Lessons › Markets of the world › Circuit breakers and price limits

World 6 · Markets of the world · lesson 10 · level 3

Circuit breakers and price limits

When prices fall too fast some markets hit pause, but not every market has a pause button.

In one line

When prices fall too fast some markets hit pause, but not every market has a pause button.

Explained simply

Think of a referee who stops a game when things get out of hand, so everyone can calm down before play resumes. Some stock markets have that kind of pause button when prices fall too fast. Others, like crypto and forex, have no market-wide pause at all.

The lesson

US stocks have market-wide circuit breakers based on the S&P 500's previous close: a 7% or 13% fall pauses trading for 15 minutes if it happens before 15:25 New York time, and a 20% fall halts trading for the rest of the day. India can halt trading when the Nifty 50 or Sensex moves 10%, 15% or 20% in either direction, for a time that depends on the level and the time of day. Tokyo sets a daily price limit for each stock, and many futures contracts have price limits or short automatic pauses. Spot crypto and forex have no market-wide pause, so prices can keep moving at any hour.

A worked example

Illustrative example: the S&P 500 closed yesterday at 5,000. A 7% fall would take it to 4,650 (5,000 times 0.93), a 13% fall to 4,350 (5,000 times 0.87) and a 20% fall to 4,000 (5,000 times 0.8). If the index hits 4,650 at 11:00 New York time, trading pauses for 15 minutes; if it hits 4,000 at any time, trading stops for the day.

The same idea at four levels

1. Beginner. Some markets pause trading when prices fall too fast, to give everyone time to think.
2. Foundation. In the US, a 7% or 13% fall in the S&P 500 before 15:25 New York time pauses trading for 15 minutes, and a 20% fall stops it for the day.
3. Intermediate. India can halt trading on 10%, 15% or 20% moves in the Nifty 50 or Sensex, for a time that depends on the level and the time of day.
4. Advanced. Tokyo limits each stock's daily move, many futures have price limits or brief pauses, and spot crypto and forex have no market-wide pause.
5. Expert. Experts know a pause does not stop losses, because prices can keep falling after trading resumes, so they cut size as an index nears a trigger.

Mistakes to avoid

• Believing a circuit breaker stops losses; prices can keep falling after trading resumes.
• Expecting a pause in crypto or forex, where there is none at the market level.
• Forgetting that the US 7% and 13% pauses do not apply at or after 15:25 New York time.

Goal of this lesson: Know how different markets pause or limit trading during extreme moves.