Question

What are Circuit Breakers with respect to the New York Stock Exchange? When and why were they first created? How do they decrease the efficiency of the stock market?

Answer 1

Circuit breakers are a type of limit on trading on New York stock exchange and these limit on trading are applicable when there is a sudden fall in the market, breaching threshold limit in the stipulated time period. Circuit breakers were put in place to avoid panic selling like one that happened in 1987, also referred to as black Monday. The circuit breaker is applied for when market falls, there are different threshold that is applicable, drop in the market of 13%, it triggers 15-minute halt in trading and more than 20% drop will trigger halt in trading for the rest of day. They were put in place in 1987 and the reason was to reduce the panic selling being caused because of sudden news or any terror attacks. Although circuit breakers were put in place to reduce panic and protect the interest of the investor but it does reduce the efficiency in the market because when markets are closed people who are holding the security can not find enough liquidity to sell it. This can also affect the price of the security of the stock in positive as well as negative way.