Markets in Focus: Market Wide Circuit Breakers Did No Harm

During March, four Market Wide Circuit Breakers (MWCBs) hit. Although the final MWCB triggered in the middle of the day (at 12:56 p.m. ET) the first three triggered early in the morning (9:34 a.m., then 9:35 a.m., then 9:30 a.m.). Each time the market:

• Opened roughly in line with premarket SPY ETF trading.
• Reopened 15 minutes later in the day at basically the same levels as the premarket SPY ETF.

And that’s led some to posit that MWCBs need to be re-engineered, and maybe shouldn’t trigger in the open.

To that, we’d say “not so fast.”  A data set of four MWCBs is hardly an exhaustive set of examples.

The fundamental purpose of a MWCB is to stop feedback loops forming that cause price dislocations and perpetuate liquidity gaps.

The March data shows markets traded higher than the MWCB level less than an hour later in the day, even the day that halted stocks after just one second of trading and closed down 11% for the day (purple line in Chart 1, below). While we can’t know in hindsight if the MWCBs prevented a worse selloff or “feedback loop,” the absence of capitulation on re-open is a positive.

Chart 1: Markets re-opened at roughly the levels indicated before the close

We’ve also noted that the majority of single stock Limit Up, Limit Down (LULD) halts occurred immediately after the MWCB re-open and were Limit Up. That seems to indicate that the MWCBs may have stopped some stocks with a lack of buyers from selling off even more.

We should also consider events where a MWCB would have helped and didn’t trigger. Black Monday in 1987, the Flash Crash of 2010 and the market plunge of August 24, 2015 should all be part of this discussion.

August 24, 2015 is especially relevant because it also occurred on open. In fact, it was later discovered that the MWCB should have triggered that day. If it had functioned as intended, it likely would have eliminated some of the stop-loss orders that added to the capitulation that day, reduced ETF mispricing and limited the many bad fills investors received. The reason it didn’t work as expected was because of stale prices on NYSE stocks, leading S&P to modify their calculation so that didn’t occur this time around.

Overall, the MWCBs worked as designed. At a time of great uncertainty, MWCB rules were easy to remember. That helped traders focus on what is important.

The drops that trigger each halt—7%, 13%, 20%—is something almost all of us can remember.

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Economy

Phil Mackintosh

Nasdaq

Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

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