Circuit Breakers
Since the crashes of 1929 and 1987, safeguards have been put in place to prevent crashes due to panicked stockholders selling their assets. Such safeguards include trading curbs, or circuit breakers, which prevent any trade activity whatsoever for a certain period of time following a sharp decline in stock prices, in hopes of stabilizing the market and preventing it from falling further.
For example, the New York Stock Exchange (NYSE) has a set of thresholds in place to guard against crashes. They provide for trading halts in all equities and options markets during a severe market decline as measured by a single-day decline in the S&P 500 Index. According to the NYSE:
A market-wide trading halt can be triggered if the S&P 500 Index declines in price as compared to the prior day’s closing price of that index.
The triggers have been set by the markets at three circuit breaker thresholds—7% (Level 1), 13% (Level 2), and 20% (Level 3).
A market decline that triggers a Level 1 or Level 2 circuit breaker after 9:30 a.m. ET and before 3:25 p.m. ET will halt market-wide trading for 15 minutes, while a similar market decline at or after 3:25 p.m. ET will not halt market-wide trading.
A market decline that triggers a Level 3 circuit breaker, at any time during the trading day, will halt market-wide trading for the remainder of the trading day.