U.S. stock markets fell quickly Monday morning after Standard and Poor's cut the nation's credit rating. By 11a.m., the Dow Jones was down nearly 350 points — or more than 3 percent. The S&P 500 and Nasdaq were down by nearly 4 percent.
With big drops like this, how much does the Dow need to fall before trading is stopped?
After the stock market crashes of 1987 and 1989, the New York Stock Exchange established circuit breakers. These kick-in depending on how much the market has lost and at what time of day. The goal is to stop trading for a brief period to allow investors to basically catch their breath and assess the situation.
Each quarter, new circuit breaker levels are published by the Stock Exchange. They are based on the average value of the Dow from the previous month. If the market drops below these levels, trading is stopped for a specific period of time based on the time of day when the drop occurred.
Currently, if the Dow loses 1,200 points before 2 p.m., then trading would stop for an hour. If the Dow lost 2,400 points before 1 p.m., trading would stop for two hours.
The Nasdaq has similar circuit breakers.
On the other hand, if the market is roaring ahead, there is no stopping of trading.