The financial markets experienced significant turmoil on Friday as the S&P 500 index fell dramatically, leading to trading halts across major exchanges. The S&P 500 had a peak to trough intraday decline of 7%. This dip surged immediately to 13% and then dramatically dropped by 20%. The New York Stock Exchange’s answer to the sudden crash was to suspend trading for the day. This is a decision that tends to only be considered in periods of acute market turmoil.
When all was said and done, the Dow Jones Industrial Average tanked 6.9% during the trading day. This drop is its biggest one-day fall since June 11, 2020. The Nasdaq Composite fell off a cliff, down 5.8%. This decline sent it into bear market territory, as it dropped more than 20% from its all-time peak in December. This trend doesn’t stop as the S&P 500 tanked close to 6% on Friday. This stunning decline is its worst performance since March 16, 2020, when it was subject to a heart-stopping drop of 11.98%.
The idea of “circuit breakers” is key to grasping how trading halts operate during major market crashes. These types of actions kick in when the S&P 500 index takes significant drops. Specifically, if the index drops by 7% before 3:25 p.m. ET, trading is paused for 15 minutes. This mechanism is meant to give market participants a short window of time to recalibrate their positions in the midst of volatile markets.
Intraday fluctuations to the index can play havoc with equity trading. If larger declines in the S&P 500 happen, one of the circuit breakers can suspend trading across the whole market. Notably, if S&P 500 futures decline by 7% during non-U.S. trading hours, trading is halted until buyers willing to purchase at the “limit down” level emerge. This system was put in place to curb panic selling and enable a more orderly market reaction.
The recent stock market upheaval may be reminiscent of past crises. Most remarkably, this was the case when the Covid-19 pandemic sent markets crashing around the world in March 2020. As of this writing, the S&P 500 is still about 17% off its all-time max from mid-February. Investors and analysts are raising alarms about the recent market developments. They are afraid that further deterioration might put the overall health of the economy at risk.