Understanding Circuit Breakers, Our New Reality, in the Time of COVID-19
In the midst of the COVID-19 pandemic, the financial markets have experienced significant volatility. During the course of this volatility, exchanges have halted trading multiple times after declines in trading trigged circuit breakers. In addition, trading floors are transitioning to electronic trading in efforts to prevent the transmission of COVID-19 on physical trading floors. With the recent turmoil, this post provides a high-level summary of the various types of circuit breakers and what can be expected.
Market-Wide Circuit Breakers ("MWCB")
Through rule changes approved by the SEC in 2012, U.S. equity, options, and future exchanges (including, but not limited to NYSE and NASDAQ, and Cboe) are required to impose trading halts when the market as a whole—measured by the S&P 500® index—experiences steep single-day declines. The MWCBs temporarily halt trading in all National Market System ("NMS") securities in the event a MWCB is breached. The triggering benchmarks are as follows:![](https://assetmanagementadvocateredesign.perkinscoieblogs.com/wp-content/uploads/sites/38/2020/03/MW-Circuit-Breakers-624x326.jpg)
Single-Stock Circuit Breakers
Limit Up-Limit Down Plan ("LULD") To address extraordinary market volatility, in April 2019 the SEC approved the LULD plan. LULD prevents trades in NMS securities from occurring outside of specified price bands, which are set at a percentage level above and below the average reference price of a security over the preceding five-minute period. The price band percentage does not change intraday; the previous day's closing prices on the Primary Listing market is used to determine the reference price bands for that day exclusive of intraday price changes. The percentage levels for the price bands are dependent on a security's designation as a Tier 1 or Tier 2 security. Tier 1 comprises all securities in the S&P 500, the Russell 1000 and select exchange traded products. With limited exceptions, Tier 2 comprises all other NMS securities. Per the LULD website, the current price bands themselves are as follows:![](https://assetmanagementadvocateredesign.perkinscoieblogs.com/wp-content/uploads/sites/38/2020/03/LULD-624x176.jpg)
All-Electronic "Trading Floors"
NYSE On March 23, 2020, NYSE temporarily moved to all-electronic trading after invoking its business continuity plan because of the COVID-19 pandemic. The specific closures are the NYSE equities trading floor in New York, NYSE American Options trading floor in New York, and NYSE Arca Options trading floor in San Francisco. While trading is generally continuing per usual, according to the NYSE, there are several differences as a result of all electronic trading:- On the NYSE's equities market, the Designated Market Makers digitally provide liquidity in their stocks; however, floor broker order types are unavailable.
- On the NYSE's options markets, electronic trading continues normally but open-outcry trading is suspended.
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