What is a 'circuit breaker' where stock market transactions are forcibly suspended?
Stock markets around the world are declining due to the confusion caused by the spread of the
Circuit Breaker Definition
https://www.investopedia.com/terms/c/circuitbreaker.asp
Concerns about the new coronavirus infectious disease have affected economic activity in countries, such as companies shutting down offices and factories and canceling industry conferences and exhibitions. Some companies have been forced into bankruptcy due to a decline in the number of companies . In addition, there have been movements to restrict the movement of people, such as a blockade in Italy and a temporary suspension of entry from Europe in the United States.
Concerns were widespread among companies and equity traders, including comments on the possibility that the new coronavirus could trigger a recession.
Is there a risk that the new coronavirus will trigger a recession? -GIGAZINE
Then, on the morning of March 9, 2020, the S & P 500 declined 7% from the start of the transaction, triggering a circuit breaker, an automatic trading stop system. All stock trading has been suspended for approximately 15 minutes.
NY Dow temporarily over $ 2,000 cheaper Immediately after approaching, triggering trading halt (Photo = AP): Nihon Keizai Shimbun
https://www.nikkei.com/article/DGXMZO56593930Z00C20A3MM8000/
In addition, a circuit breaker was activated again on March 12 of the same week. The Dow Jones average share price has fallen to 9.99%, surpassing the 7.87% recorded on October 15, 2008 during the Lehman Shock, which triggered the global financial crisis.
NY Dow drops $ 2,352, record-breaking U.S. warning of US entry restrictions (Photo: Reuters): Nihon Keizai Shimbun
https://www.nikkei.com/article/DGXMZO56743620T10C20A3000000/
The circuit breaker triggered this time is a security system that suppresses panic selling on US stock exchanges, and is applied not only to a wide range of stock indices including the S & P 500, but also to individual stocks. According to Investopedia, 'If the volatility of the stock price exceeds a predefined range, the circuit breaker works by temporarily suspending trading.'
The ' Black Monday ' that occurred on October 19, 1987 triggered the establishment of the circuit breaker. Regulators who thought that it was necessary to curb excessive stock trading in the event of a panic, as the stock price fell too far, including the Dow Jones average price drop of 22.61%. Has introduced a circuit breaker.
In addition, on May 6, 2010, an instantaneous stock crash , known as a ' flash crash ', caused the Dow Jones to fall more than 9% in just 10 minutes. At this time, the circuit breaker did not activate, so a new circuit breaker activation standard was established in 2013 and it will be up to the present. The activation of the circuit breaker on March 9 was the first time since the new rules were applied in 2013, but shortly thereafter the second circuit breaker was activated.
At the time of writing, the circuit breaker was applied to both the overall stock index and the individual stocks, each with different criteria for triggering. The circuit breaker was triggered in March 2020 due to the drop in the S & P 500 of the stock index, which met the trigger criteria for the overall stock index.
The decline in the overall stock index that triggers a circuit breaker is divided into three stages:
◆ Level 1: Stock index falls 7% from the previous day's closing price
◆ Level 2: Stock index falls 13% from the previous day's closing price
◆ Level 3: Stock index falls 20% from the previous day's closing price
If you meet Level 1 or Level 2 criteria, the circuit breaker will trigger a 15-minute suspension of all stock trading. On the other hand, if the criteria of level 3 are met, all trading will be stopped until 16:00 when the trading time ends. Investopedia has noted that exchange-traded funds (ETFs) are not considered to be an overall stock index and are subject to circuit breakers as individual stocks.
The criteria for individual stocks are more complex, with different criteria depending on the stock's rating and price, and even for price increases, unlike the overall stock index. The classification of stocks and the criteria for activating circuit breakers are as follows.
◆ 1: S & P 500 and
Immediately after the stock market opens (9:30 to 45) and immediately before it closes (15:35 to 16:00) when the price exceeds 10% above and below the base price. From 9:45 to 15:35, when the price exceeds 5% above and below the standard price.
◆ 2: Shares whose closing price on the previous day exceeds $ 3 per share but is not included in “$ 1”
Immediately after the stock market opens (9:30 to 45) and immediately before it closes (15:35 to 16:00), when the price exceeds 20% above and below the base price. From 9:45 to 15:35, when the price exceeds 10% above and below the standard price.
◆ 3: Shares with a closing price of $ 0.75 per share (about ¥ 80) or more and less than $ 3 per day on the previous day
Immediately after the stock market opens (9:30 to 45) and immediately before it closes (15:35 to 16:00), when the price exceeds 40% above and below the base price. From 9:45 to 15:35, when the price is more than 20% above and below the standard price.
◆ 4: Shares less than $ 0.75
Immediately after the stock market opens (9:30 to 45) and immediately before closing (15:35 to 16:00), when the price exceeds 75% above or below the base price or when it exceeds $ 0.15 (about 15 yen). From 9:45 to 15:35, when the price exceeds 150% above or below the standard price or 0.3 dollars (about 30 yen).
The `` base price '' under the above trigger conditions is the `` average price for the past 5 minutes '' for each stock, and if trading at the price range that satisfies the conditions continues for more than 15 seconds, the circuit breaker will be triggered You. Investopedia said the duration of the primary outage is shorter than the overall stock index trigger, up to 10 minutes.
In the Japanese stock market, a system called 'circuit breaker' is introduced only in some futures and option markets. On the other hand, there are systems called “ special quote system ” and “ continuous contract quote system ”, which are similar to circuit breakers in the system. In each case, it is said that contracts are held independently for each stock.
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