What are market-wide circuit breakers and when do they happen?

When market volatility is high, the federal government can enact what is called a trading curb, or “circuit breaker.” Similar to how a circuit breaker works in your home, a trading curb is a temporary freeze on activity (buying or selling) for a specific duration of time so that the market can stabilize.

The purpose of these temporary halts on trading activity is to encourage investors to take a step back and think through their investment decisions rationally. The duration of the mandatory freeze depends on how volatile the market is, with swings in the S&P 500 Index serving as a reference point. The S&P Index measures the performance of 500 large companies listed on the U.S. stock exchanges.

The key thing to keep in mind is that trading curbs are temporary, and they are designed to protect investors from irrational behavior.

How long do temporary freezes last?

There are three levels of circuit breakers that correspond to thresholds of market activity.

Level 1: 15-minute freeze

A level 1 circuit breaker is enforced when there is a 7% decline from the prior day’s close. The result is a 15-minute trading halt, unless the market dips 7% within 35 minutes of the closing bell (4:30 p.m. ET), in which case there is no freeze.

Level 2: 15-minute freeze

A level 2 circuit breaker happens when the drop in the S&P 500 is 13% off of the previous day’s close. Just as is the case with a Level 1 scenario, if the drop occurs with 35 minutes of the closing bell then there is no freeze.

Level 3: Closed for the remainder of the day

Should the S&P 500 drop 20% in a single day, the markets will be shut down for the remainder of the day and no trading will be able to occur. Markets will resume activity the following day.

What should I do during a temporary freeze?

A trading curb can feel scary, especially for investors who have not endured periods of market volatility in their experience as an investor. You might attempt to buy or sell a stock or ETF during these times and feel panicked that you are unable to do so. What’s important is to keep in mind that these freezes are designed to protect you against acting out of fear.

For long-term investors, periods of market volatility can be expected. Historically, the U.S. stock market has experienced its share of ups and downs, with the ups greatly outpacing the downs over time. In fact, the historical average stock market return is 10%.

Who mandates these temporary freezes?

Circuit breakers are required by the federal government (Securities and Exchange Commission). The actions halt ALL trading activity for the specific duration, including large and small investors alike.

It is important to note that brokerages like Public.com cannot override these freezes. During a mandatory circuit breaker, you will not be able to buy or sell stocks or ETFs on Public until the time window has passed. These restrictions are not a function of our product, but rather a requirement of our business to adhere to federal law.

Trading curbs were first introduced after the “Black Monday” market event in October 1987.

Where can I get more information?

You can read more about mandatory market freezes on the NYSE website.

Although there is nothing Public can do during a mandatory market freeze, you can reach out to us at hello@public.com or via the in-app support chat if you are confused or have questions about your account. We are here to help.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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