Market-Wide Circuit Breakers

The market-wide circuit breaker halt rule is short, and almost everything a trader needs sits in its supplementary material and in the primary listing market's own rule. This lesson uses the Nasdaq market-wide circuit breaker rule as the worked example of a primary listing market's percentages and timing.

What Triggers a Market-Wide Trading Halt Off Exchange?

Under the procedures in the trading halts rule, FINRA shall halt all trading otherwise than on an exchange in any national market system (NMS) stock if other major securities markets initiate market-wide trading halts in response to their rules or extraordinary market conditions, or if otherwise directed by the SEC.

Members must halt quoting and trading otherwise than on an exchange in any NMS stock as of the time the market-wide trading halt is publicly disseminated.

Exam Tip: Gotchas

• The member's clock runs from public dissemination, not from a FINRA message. Quoting and trading stop when the market-wide halt is publicly disseminated, so a firm waiting for its own notice is already late.
• The rule reaches quoting as well as trading. A firm that stops executing but leaves its quotations displayed has complied with half of one sentence.

What Counts as a Market Decline, and at What Levels?

A Market Decline is a decline in the value of the S&P 500 Index between 9:30 a.m. and 4:00 p.m. on a trading day, measured against the closing value of that index for the immediately preceding trading day.

The levels come from the primary listing market, and the applicable Level 1, Level 2 and Level 3 declines are publicly disseminated before 9:30 a.m. Eastern on the trading day:

On a Level 1, Level 2 or Level 3 Market Decline, as determined by a primary listing market and publicly disseminated, FINRA shall halt trading otherwise than on an exchange in all NMS stocks, and shall not permit resumption for the time periods the primary listing market specifies, except as otherwise provided.

That closing qualifier is doing work. The discretionary early resumption set out in the section on resuming off-exchange trading after a Level 1 or Level 2 halt is one of the exceptions it preserves.

Exam Tip: Gotchas

• The measurement window closes at 4:00 p.m. and the reference is yesterday's close. A decline measured against the day's own opening print, or against an intraday high, is not a Market Decline as the rule defines it.
• FINRA does not set the level; the primary listing market does. FINRA's duty is triggered by that market's determination and public dissemination.

How Long Does Each Level Halt Trading?

The durations sit in the primary listing market's rule:

• A Level 1 or Level 2 Market Decline occurring after 9:30 a.m. and up to and including 3:25 p.m. Eastern, or 12:25 p.m. Eastern in the case of an early scheduled close, halts trading in all stocks for 15 minutes.
• Trading is halted on a Level 1 or Level 2 basis only once per trading day, which the exchanges read as once for each level.
• There is no halt if a Level 1 or Level 2 Market Decline occurs after 3:25 p.m. Eastern, or after 12:25 p.m. Eastern on an early scheduled close.
• A Level 3 Market Decline occurring at any time during the trading day halts trading in all stocks for the remainder of the trading day.

Exam Tip: Gotchas

• The late-day cutoff does not reach Level 3. A Level 3 decline at 3:40 p.m. still closes the market for the rest of the day, because its trigger is written as any time during the trading day.
• Once per day applies to each lower level. A second Level 1 decline after a Level 1 halt brings no new halt, but a Level 2 decline after a Level 1 halt earlier the same day still halts trading for fifteen minutes.

When May Off-Exchange Trading Resume After a Level 1 or Level 2 Halt?

Where trading is halted in all NMS stocks for a Level 1 or Level 2 Market Decline, FINRA will halt off-exchange trading in all NMS stocks until trading has resumed on the primary listing market.

If, however, the primary listing market does not reopen a security within 15 minutes following the end of the 15-minute halt period, FINRA may permit the resumption of off-exchange trading in that security if trading in the security has commenced on at least one other national securities exchange.

For a Level 3 Market Decline occurring at any time during the trading day, FINRA shall halt off-exchange trading in all NMS stocks for the remainder of the trading day.

The reopening auction that brings a halted security back is run by the primary listing market. It is covered in the lesson on halt and imbalance crosses.

Exam Tip: Gotchas

• The fifteen-minute grace period runs from the end of the halt, not its start. The clock that lets FINRA act begins when the fifteen-minute halt period ends.
• Two conditions gate the discretionary resumption. FINRA may permit it, and only where trading in that security has commenced on at least one other national securities exchange.

Who Must Take Part in the Annual Circuit Breaker Test?

Members that FINRA has designated to participate in its periodic, scheduled business continuity and disaster recovery testing with respect to a FINRA Trade Reporting Facility (TRF) or the Alternative Display Facility (ADF) are required to participate in at least one industry-wide market-wide circuit breaker (MWCB) test each year, and to verify their participation by attesting that they are able to, or have attempted to, do four things:

• Receive and process MWCB halt messages from the securities information processors (SIPs).
• Receive and process resume messages from the SIPs following an MWCB halt.
• Receive and process market data from the SIPs relevant to MWCB halts.
• Send quotes, trades or both, as applicable, to the facility or facilities for which the member has been designated, following a Level 1 or Level 2 MWCB halt, in a manner consistent with their usual trading behavior.

A member participating in an MWCB test that is unable to receive and process any of those messages should, in its attestation, notify FINRA which messages it could not process and, if known, why. Members not designated for that testing are permitted to participate in any MWCB test.

Exam Tip: Gotchas

• The attestation is about ability or attempt, not about success. The wording covers a member that is able to do each item or has attempted to.
• Three of the four items name the securities information processors as the source. Halt messages, resume messages and market data all come from the processors, which is the detail that drops out when the list is compressed.
• The reporting item is limited to a Level 1 or Level 2 halt. Sending quotes or trades after a Level 3 halt is not part of the attestation, because that halt closes the day.

What Happens to OTC Equity Securities During a Circuit Breaker Halt?

Where FINRA has halted trading otherwise than on an exchange in all NMS stocks under the market-wide circuit breaker halt rule, FINRA also shall halt trading in all OTC equity securities until the circuit breaker is no longer in effect for NMS stocks.

Members must halt quoting and trading in all OTC equity securities as of the time the market-wide trading halt in NMS stocks is publicly disseminated.

Exam Tip: Gotchas

• The OTC halt is automatic and its duration is borrowed. It lasts until the circuit breaker is no longer in effect for NMS stocks, so nothing separate has to lift it.

What Should You Check on Exam Day?

• Confirm the decline level before anything else: 7% and 13% each run a fifteen-minute halt at most once a day, 20% closes the day.
• Check the time of the decline against the 3:25 p.m. Eastern cutoff, and remember that cutoff does not apply to a Level 3 decline.
• For a discretionary off-exchange resumption, look for both the fifteen minutes past the end of the halt and trading commencing on another exchange.
• Ask whether the scenario names a designated testing member; only those members owe the annual test and its four-item attestation.
• Confirm the member halted quoting as well as trading, in OTC equity securities as well as NMS stocks, at public dissemination.