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Definition

A system of limiting trading highs and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines. Thus when a market falls sharply it can go “limit down” meaning that it has fallen by the maximum allowed by the rules of that exchange. Trading below that level is then disallowed until the following trading day. The purpose is to allow the market time to absorb negative information and to avoid a crash. For example, on 16th March 2020, the S&P500, which is a weighted average of the 500 largest stocks trading on Wall Street, went "limit down" for the third time after it fell 8,15% at the opening. This fall triggered a 15-minute halt to trading after which markets were more controlled and less volatile. At the time the Federal Reserve Bank cut a further 100 basis points off their repo rate - following a 50 basis point cut a week earlier - in an effort to stabilise the market. The New York Stock Exchange (NYSE) has three circuit breakers on any single day's trade. The first kicks in after the market falls 7% or more and lasts for 15 minutes. The second kicks in after the market has fallen 13% and also lasts for 15 minutes. The third kicks in after the market has fallen 20% and closes the market for the rest of the day. On 4th April 2025, following Trump's "Liberation Day" on 2nd April 2025 when he imposed heavy tariffs on most countries across the world and then China's retaliatory tariff on US goods, the S&P500 fell by 5,97% - coming close to the first circuit breaker at 7%.

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