What Is a Restriction Rule?

The S&P 500 crashed so hard this morning that the New York Stock Exchange temporarily suspended trading. This was not a glitch, but a function of protecting investors in volatile markets.

Limit Reduction prevents oversales that can occur after a market crash, which in turn could exacerbate the decline. Rather than spiraling out of control, the NYSE pauses to cool down trading.

This is half of the up-and-down constraint rule. The New York Stock Exchange and NASDAQ have these rules to control trading beyond reasonable limits.

There are three levels of limit downgrades that can be applied during a normal trading day (9:30 am to 4:00 pm ET) and can be applied to any number of securities (stocks, bonds, futures, options, etc.).

Here’s how TheStreet ‘s Katharine Ross explains the levels:

Level 1: If the S&P 500 falls 7%, trading will be suspended for 15 minutes.

However, the second level comes into play, if the S&P 500 falls 13%, trading will be suspended again until 15 minutes IF the fall occurs at 15:25 or earlier. There is no stopping after that.

Finally, Level 3 takes effect if the S&P 500 [falls] 20%, trading will stop for the rest of the day.

The downgraded “circuit breaker” was last used for inventory in December 2008; The cut in the futures limit was used in 2016 when oil prices plummeted following the election of President Trump. According to Yahoo Finance, 15% and 20% stops were never used.

Why the sudden recession? The ongoing debate about the spread of the coronavirus is making many investors nervous. In addition, the Federal Reserve announced today that it will provide some cash for short-term bank financing amid volatility. This all comes together in a bundle of worries for investors who may decide to sell now rather than wait to see how low the markets can go.


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