If the S&P 500 exceeds a 7% one day decline, circuit breakers can be implemented. Here's how they work.
The circuit-breakers seem most useful in liquidity events. If there are issues with order flow, then circuit-breakers can enable market makers to regroup over a 15 minute interval and perhaps bring the markets closer to balance. This may have been the issue on Black Monday when programmatic selling due to portfolio insurance, may have overwhelmed the market causing a massive price decline.
However, if a circuit breaker is triggered not by liquidity issues, but by newsflow then the value is less clear. For example, if the combination of the coronavirus and the oil price cause the markets to materially and rapidly reevaluate prospects for global economic growth, then a 15 minute pause in trading may be less useful. That is to say a 15 minute pause may not change anything if a view is fundamentally held.
Furthermore, there are some implications from overlapping global markets. If one market such as the NYSE triggers a circuit breaker, but other markets remain open, then it is highly likely that investors will still find a route to obtain their desired exposure in a different market not subject to a circuit breaker at the time.
Again, this gets to the point that circuit breakers help manage times of issues with liquidity, if there truly is an event that radically changes perceptions of valuation or growth, then circuit breakers are likely less valuable. Nonetheless, based on market history it appears usage of circuit breakers will be rate.
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