Hang onto yer ass, boyzz!
The S&P 500 fell more than 7% Monday, triggering circuit breakers that prevent a further plunge.
The index hit “limit down” shortly after the open, halting trading below that level for 15 minutes. The market was set to resume trading at 9:49 am ET.
In addition to the S&P, the most all-encompassing large-cap stock index, the Dow Jones Industrial Average fell 7.3% while the Nasdaq, which is concentrated in technology names, slid 6.9%.
What is ‘limit down’?
According to the New York Stock Exchange, a market trading halt may occur at “three circuit breaker thresholds” on the S&P 500 due to large declines and volatility. The exchange classifies this at three levels based on the preceding session’s close in the S&P 500.
The rules, which apply to regular trading hours only, are as follows:
- Level 1: If the S&P 500 drops 7%, trading will pause for 15 minutes.
- Level 2: If the S&P 500 declines 13%, trading will again pause for 15 minutes if the drop occurs on or before 3:25 p.m. ET. There will be no halt if the drop happens after that. (This would occur Monday if the S&P falls 386 points).
- Level 3: If the S&P 500 falls 20%, trading would halt for the remainder of the day. (This would occur if the S&P falls 594 points).
These circuit breakers have never been triggered in their current form during regular trading hours. The prior circuit breaker system was revamped after it failed to prevent the May 2010 flash crash. The current set of breakers were put into effect in February 2013.
ETFs tell the tale
Since U.S. futures are pinned at limit down, they don’t tell us all we need to know about how the open might go. Exchange-traded funds based on the indexes, however, continue to trade in the premarket. The SPDR S&P 500 ETF around 8:40 a.m. ET indicated a 7.1% drop in the S&P 500 once trading resumed. Both the SPDR Dow ETF and the SPDR Nasdaq ETF suggested declines of more than 6.5% at the open.
These ETFs are very accurate in reflecting market trends even when the underlying stocks are not open. The broadest China ETF, the iShares MSCI China ETF, very accurately reflected the drop in Chinese shares in late January and early February even when the China market was closed for more than a week.