Stock market triggers exist as a way to stop trading activity when a frenzy builds in order to prevent dangerous market conditions. The triggers are tied to certain milestones in a market, such as in the New York Stock Exchange (NYSE) and NASDAQ. When market activity reaches a predetermined level, it triggers a halt in trading in that exchange. Stock market triggers are commonly used both in the U.S. and in international exchanges. They also are called circuit breakers or trigger points.
Stock exchanges use different ways of measuring decline when setting their trigger points. For instance, both the NYSE and NASDAQ set thresholds based on the levels of decline in the Dow Jones Industrial Average (DJIA) in a single day. In both exchanges, the length of the halt in trading depends on the amount of the decline and the time of day that the threshold is reached.
Stock market triggers are designed to prevent rapid, steep market declines from becoming market crashes spurred on by panicked investors. The triggers are put in place to slow the decline, and allow for a period for the market to calm down. This break provides investors with the luxury of time to access, review and process relevant information without the pressure of a falling stock market. Because prices are momentarily frozen, investors can focus on research without worrying that prices are dropping every minute. The halt exists so that investors can make trading decisions based on information and not solely on the concern and fear that arises when the bottom is dropping out of the market.
New York Stock Exchange and NASDAQ Triggers
The current triggers at the New York Stock Exchange and NASDAQ were approved in 1998 by the Securities and Exchange Commission (SEC). The triggers were established for scenarios involving market plunges of 10 percent, 20 percent and 30 percent in the DJIA. For the first quarter of 2012, that amounted to estimated drops of 1,200 points (10 percent), 2,400 points (20 percent) and 3,600 points (30 percent). Declines reaching those amounts in a single day would prompt a temporary halt in trading.
Triggers and Time Periods
The length of the trading halts depend on when the trigger points are reached. In the event of a 10-percent drop before 2 p.m., the market stops trading for one hour. A 10-percent drop between 2 and 2:30 p.m. would cause a 30-minute halt. However, that level decline after 2:30 p.m. would not activate the trigger. A 20-percent drop before 1 p.m. causes a two-hour stop; between 1 and 2 p.m. causes a one-hour halt, and a drop after 2 p.m. leads to the market to close. Any decline of 30 percent or more automatically shuts down the market for the day.
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