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Circuit Breakers

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In the world of electronics, circuit breakers cut the flow of electricity when there’s an overwhelming surge of power. In stock markets, they do pretty much the same thing. Introduced in the U.S. after a 23 percent crash in the Dow Jones Industrial Average on Black Monday in 1987, circuit breakers trigger a timeout from trading after prices tumble by a predetermined amount. Their use has spread globally as a tool to take the sting out of market meltdowns — and to address the risk of erroneous trades in an era of high-frequency trading. They can also backfire, as China and the U.S. have experienced, adding to the volatility they’re intended to curb.

On Feb. 5, 2018, when the S&P 500 plunged as much as 4.5 percent and the Dow Jones Industrial Average tumbled almost 1,600 points — its biggest intraday point decline in history — it wasn't enough to set off the U.S. circuit breakers. It now takes 7 percent and 13 percent drops in the broader S&P 500 to prompt 15-minute pauses in trading, and a 20 percent decline to close U.S. markets for the day. The Dow's loss was greater than the nearly 1,000-point decline on May 6, 2010, the day of the infamous "flash crash," yet in percentage terms it was lower. The flash crash resulted in new safeguards, including limits for individual securities. In August 2015, those single-stock circuit breakers produced unprecedented disruption as 327 exchange-traded funds experienced more than 1,000 trading halts during a single day. In China, circuit breakers lasted four days when first introduced in 2016, also with unwelcome results.  They were blamed for feeding panic selling and suspended indefinitely. As of 2018, European Union regulators require circuit breakers for high-frequency and algorithmic trading, part of a broader effort to control systemic market risks.