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Traders on the floor of the New York Stock Exchange experience intense market fluctuations as stock prices and futures plunge within a single trading session. To mitigate the risk of significant downturns that can lead to market crashes, trading halts are enacted. These measures are particularly prominent during periods of severe market volatility, reminiscent of March 2020 when the Covid-19 pandemic led to a widespread market dip.
Currently, mounting global trade tensions stemming from unexpectedly high tariffs introduced by President Donald Trump are exerting considerable pressure on stock markets, creating an atmosphere of selling that intensified as the week progressed. Futures associated with the S&P 500 faced substantial declines during overnight trading.
‘Limit down’ futures
During non-U.S. trading hours, which run from 6 p.m. ET until 9:30 a.m. ET the following day, S&P futures experience a trading halt if they decrease by 7%. This pause allows for the adjustment of prices until buyers at the “limit down” level enter the market. Notably, Russell 2000 futures, which reflect the small-cap market index, briefly hit this limit, falling by 7% before rebounding.
NYSE circuit breakers
In the regular trading hours between 9:30 a.m. ET and 4 p.m. ET, a decline in the S&P 500 can trigger a market-wide pause under the designated circuit breaker system. These circuit breakers activate when the S&P 500 index drops by specific amounts during the day, necessitating a temporary shutdown of trading. This protocol is standardized across all major stock exchanges.
There are three levels of circuit breakers:
- Level 1: A 7% decline in the S&P 500. If this occurs before 3:25 p.m. ET, trading is halted for 15 minutes. If it occurs afterwards, trading continues unless a Level 3 breaker is activated.
- Level 2: A 13% drop in the S&P 500. Similar to Level 1, trading pauses for 15 minutes if this happens before 3:25 p.m. ET and continues afterward, barring a Level 3 trigger.
- Level 3: A 20% decrease in the S&P 500. This leads to the suspension of trading for the remainder of the trading day.
The S&P 500 benchmark concluded the previous session at 5,074.08. For the upcoming trading session, here are the critical threshold values for the S&P 500 that would activate the various circuit breakers:
- Level 1: 4,718.89
- Level 2: 4,414.45
- Level 3: 4,059.26
In the wake of a tumultuous trading day, Wall Street saw significant losses on Friday, with the S&P 500 declining nearly 6%, marking its worst day since mid-March 2020 when it plummeted by nearly 12%. The Dow Jones Industrial Average fell by 6.9%, representing its steepest one-day drop since June 2020, while the Nasdaq Composite sank 5.8%, officially entering a bear market with a decrease of over 20% from its peak in December. This set the stage for an environment of heightened scrutiny and cautious trading as investors brace for potential volatility in the days ahead.
Source
www.cnbc.com