What are "circuit breakers?"

Thanks for covering "trading cubs" in your Readers Write section. I've also heard of people speaking of "circuit breakers." What does this mean?

Circuit breakers are put in place when the DJIA experiences a more extreme drop than the 2% drop needed to trigger trading curbs. While trading curbs restrict computer index arbitrage trading, circuit breakers halt all trading. The other important difference is that circuit breakers halt trading only in the event of an exaggerated drop in the DJIA.

Just like the trading curbs, circuit breakers are set every quarter. The circuit breaker levels are based upon 10%, 20% and 30% of the average closing value on the DJIA for the last month of the quarter, rounded down to the nearest 50 points. These levels are adjusted on the first day of January, April, July and October.

For the current quarter, the 10, 20 and 30 percent point decline in the DJIA that would trigger the circuit breakers are as follows: A 1,100-point drop (10% decline) in the DJIA before 2 p.m. will halt trading for one hour. A 1,100-point drop between 2-2:30 p.m. will halt trading for 30 minutes. A 1,100-point decline after 2:30 p.m. will not halt trading.

A 2,200-point drop (20% decline) in the DJIA before 1 p.m. will halt trading for two hours. A 2,200-point drop between 1-2 p.m. will halt trading for one hour. A 2,200-point drop after 2 p.m. will halt trading for the remainder of the day.

A 3,300-point drop (30% decline) in the DJIA will halt trading for the remainder of the day.

The rationale behind using circuit breakers is to give investors a break, so that when trading resumes, cooler heads will prevail. These circuit breakers have only been used once in the past (October 1997 during the Asian meltdown). In that instance, the market just kept on falling after re-opening. So much for cooler heads.

Good Luck and Have a Good Trading Day

Craig Seidler
Assistant Editor