Traders work on the floor of the New York Stock Exchange (NYSE) on March 10, 2020 in New York City.
Spencer Platt | Getty Images
Stock futures hit ‘limit down’ Thursday morning — a trading halt occurring after prices drop a certain amount — for the second time this week as global markets plunged amid investor fears about the coronavirus global pandemic.
Just as they did on Monday, futures on the S&P 500 hit limit down with a 5% decline in morning trading. Futures on the Dow and the Nasdaq-100 also hit this level.
What is ‘limit down’?
In non-U.S. trading hours — that is before the 9:30 a.m. ET open of regular trading — stock futures are halted if they hit a downside (or upside) limits of 5%. In effect, the futures get “pinned” at ‘limit down’ as no one is willing to make a trade below that level. Trading resumes at activity above that threshold. The rules are put in place to reduce panic and foster orderly market functioning.
The rules then change after trading begins at 9:30 am New York time. The New York Stock Exchange can halt trading again if the S&P 500 hits certain “circuit breaker limits” during the day. On Monday, the large-cap index quickly hit the level after the open. Trading resumed for the rest of the day without interruption.
The S&P 500 went on to plunge 7.6% in its worst day since 2008.
What is a ‘circuit breaker’?
According to the New York Stock Exchange, a market trading halt occurs at “three circuit breaker thresholds” on the S&P 500 due to large declines and volatility. The exchange classifies this at three levels based on the preceding session’s close in the S&P 500.
The rules, which apply to regular trading hours only, are as follows:
Level 1: If the S&P 500 drops 7%, trading will pause for 15 minutes.
Level 2: If the S&P 500 declines 13%, trading will again pause for 15 minutes if the drop occurs on or before 3:25 p.m. ET. There will be no halt if the drop happens after that.
Level 3: If the S&P 500 falls 20%, trading would halt for the remainder of the day.
The prior circuit breaker system was revamped after it failed to prevent the May 2010 flash crash when the Dow lost hundreds of points in just a few seconds. The current set of breakers were put into effect in February 2013.
This comes as the Dow Jones Industrial Average hit bear market territory on Wednesday which means the market is down 20% from its recent highs.
While futures trading has been halted, exchange-traded funds that track the major indexes can still trade. The SPDR S&P 500 fund, which mimics the index, was down 5.5% at 8:20 am.
