Trading techniques... using circuit breakers

Since 1988, US regulators have sought to impose so-called “circuit breakers” on both individual shares and the overall market. Once the S&P 500 falls by 7% from its opening price, trading is halted for 15 minutes (unless it is late in the trading day), with another brief interruption once the S&P 500 declines by 13%. Finally, if the market falls by 20%, then all trading is halted for the rest of the day.

For individual shares in the S&P 500, a 5% fluctuation up or down in any five-minute period will cause trading in that share to be halted for five minutes, while there is a temporary short-selling ban on any share that has fallen by 10% or more in a single day. Those supporting circuit breakers argue that they can exert a calming effect on the market by giving traders a breathing space, reducing panic-buying or selling. Advocates also claim that breakers can prevent attempts to distort or manipulate the market.

However, critics argue that it not only interferes with the market adjusting to changes in the price that are the result of new information, but could also make a crash worse by depriving the market of liquidity.

For traders the big question is whether a circuit breaker represents a buying opportunity (once trading is allowed to resume) or presages future falls. According to a study by Concordia University in Montreal, US shares that fell by 10% or more between 2012 and 2015, thus triggering the shortselling ban, tended to perform roughly in line with the market once the ban expired, suggesting that circuit breakers are not a useful trading indicator.