Here's a list of questions and answers about how U.S. exchanges use circuit breakers to restrain wild market freefalls.
Q: What's a circuit breaker?
A: A circuit breaker is a rule set by a stock market that causes trading to automatically stop
- at least temporarily - based on a dramatic shift in the value of the market.
Q: When were circuit breakers started, and why?
A: The New York Stock Exchange established circuit breakers in 1988 after the big stock market plunge in October 1987, and amended them in 1998. Circuit breakers force traders to take a breather, stop selling and refocus on economic and corporate news instead of an alarming market nosedive.
Q: The Dow Jones industrial average has shed about 40 percent of its value since its peak last October
- why haven't circuit breakers kicked in?
A: It's all about how much stocks fall in a single day. Circuit breakers aren't in place to prevent people from losing money; they're aimed at keeping the market from succumbing to huge, snowballing, panic-driven sell-offs.
Q: How far do stocks have to drop in a day for trading to stop?
A: If the Dow Jones industrial average falls 1,100 points - equivalent to about a 10 percent drop from the Dow's level at the beginning of the quarter
- before 2 p.m., the market shuts down for an hour. If it falls by that amount between 2 p.m. and 2:30 p.m., the halt lasts 30 minutes. But if stocks drop 1,100 points after 2:30 p.m., trading continues.
If the Dow falls 2,200 points - about 20 percent - before 1 p.m., the market closes for two hours. If such a decline occurs between 1 p.m. and 2 p.m., there is a one-hour pause. If stocks tumble 2,200 points after 2 p.m., the market closes for the day.
If the Dow sinks by 3,350 points - or about 30 percent from its level at the start of the quarter
- the market closes for the day, no matter what time it is.
Q: What about in pre-market trading?
A: In pre-market trading, also known as overnight trading, traders buy and sell contracts called stock futures
- basically, they're placing bets on what stocks will be worth during the upcoming trading day. Futures are controlled by the circuit breakers, or "price limits," of the Chicago Mercantile Exchange. This exchange instituted its price limits along with the NYSE in 1988, and amended them in 1998, too.