Tripping the Circuit Breakers: 'Limit Down' and Trading Halts

How market safety nets work.

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Whoops—it looks as if we tripped the premarket circuit breakers. Ahead of trading this morning, stock futures fell 6.5 percent and hit " limit down," a built-in safety net that suspends futures trading until the start of the trading session (9:30 a.m. in New York). According to Investopedia, limit down is the maximum the price of a futures contract can decline in one trading day.

Now, let's talk trading halts.

Says the Kirk Report:

We're currently in crash mode and all but the most stubborn bottom callers will get flushed out in this move. As you might expect, they're already talking about trading halts that may occur today in response to the selling. In addition, Fed Funds futures are pricing in a larger rate cut for next Wednesday and there are already rumors of an emergency rate cut this morning as well.

Trading halts aim to prevent a market freefall on exchanges such as the NYSE and Amex (but not the Nasdaq, according to the SEC), and they're enacted when there's a huge imbalance in buy and sell orders. In this case, trading is suspended to "alert market participants to the situation and allow the exchange specialists to disseminate information to investors."

These automatic halts were implemented after the stock market crashed in the late 1980s.

Here are the rules (courtesy of Money & Co):

—If the Dow falls 1,100 points before 11 a.m. PDT, trading is halted for one hour.

—If the Dow falls 1,100 points between 11 a.m. and 11:30 a.m. PDT, trading is halted for 30 minutes.

—After 11:30 a.m. PDT (with 90 minutes left in the trading day), the Dow could continue to decline past 1,100 points and no halt would be called until it fell 2,200 points.

—A Dow drop of 2,200 points any time after 11 a.m. would close the markets for the rest of the day.