Trading Halts and Circuit Breakers
With quotation rules covered, let's examine what happens when the market itself needs to pause, either for a single security or the entire market.
Regulatory Trading Halts
An exchange or FINRA may halt trading in a specific security when:
- A company is about to release material news (news pending halt)
- There is significant order imbalance in the security
- There are concerns about market manipulation or regulatory issues
During a halt:
- No transactions or quotation activity is permitted (FINRA Rule 5260)
- Trading resumes when the exchange or FINRA lifts the halt, typically after the news is disseminated
Market-Wide Circuit Breakers (MWCBs)
These are triggered by a decline in the S&P 500 Index from the prior day's closing value. Thresholds are calculated daily based on the prior trading day's close.
| Level | Trigger | Halt Duration | Time Window |
|---|---|---|---|
| Level 1 | 7% decline | 15-minute halt | 9:30 AM - 3:25 PM Eastern Time (ET) only |
| Level 2 | 13% decline | 15-minute halt | 9:30 AM - 3:25 PM ET only |
| Level 3 | 20% decline | Trading halted for the remainder of the day | Any time during regular hours |
Key rules to memorize:
- Level 1 and Level 2 halts can each be triggered only once per trading day
- If a Level 1 or Level 2 decline occurs after 3:25 PM, trading is not halted (unless it reaches Level 3)
- Level 3 halts trading for the entire remainder of the trading day regardless of when triggered
- These are governed by NYSE Rule 7.12 and corresponding rules of other exchanges
Exam Tip: Gotchas
The 3:25 PM cutoff is heavily tested. Level 1 (7%) and Level 2 (13%) do NOT trigger after 3:25 PM. Only Level 3 (20%) can halt trading at any time. If the exam describes a 7% drop at 3:30 PM, the answer is: no halt occurs.
Limit Up-Limit Down (LULD) Plan
While circuit breakers apply to the entire market, the LULD plan applies to individual National Market System (NMS) securities:
- Prevents trades from occurring outside of specified price bands set as a percentage above and below a reference price
- Reference price = average price of the security over the preceding five-minute period (not the opening price)
Price Bands by Tier
| Tier | Securities Covered | Price Band (Regular Hours) |
|---|---|---|
| Tier 1 | S&P 500, Russell 1000, and select exchange-traded products (ETPs) | 5% (for stocks priced above $3.00) |
| Tier 2 | All other NMS securities | 10% (for stocks priced above $3.00) |
| Both tiers | Stocks priced $0.75 - $3.00 | 20% |
| Both tiers | Stocks priced below $0.75 | Lesser of $0.15 or 75% |
How LULD Works
- Price bands are set as a percentage above and below the rolling five-minute average price
- If the National Best Offer equals the lower price band OR the National Best Bid equals the upper price band, trading enters a Limit State
- If the Limit State is not resolved within 15 seconds, the primary listing exchange declares a 5-minute Trading Pause
- Price bands double during the last 25 minutes of the trading day (3:35 PM to 4:00 PM) for Tier 1 stocks and Tier 2 stocks priced at or below $3.00
Exam Tip: Gotchas
LULD price bands are based on a rolling 5-minute average, not the opening price. If the exam asks what the "reference price" is for LULD, look for the five-minute average answer.
Circuit Breakers vs. LULD
| Feature | Market-Wide Circuit Breakers | Limit Up-Limit Down |
|---|---|---|
| Scope | Entire market (all securities) | Single security |
| Trigger | S&P 500 decline (7%, 13%, 20%) | Individual stock price moves outside bands |
| Levels | Three levels | Tier 1 (5%) and Tier 2 (10%) |
| Time restriction | L1/L2 only before 3:25 PM | Active all day (bands widen near close) |
| Duration | 15 min (L1/L2) or rest of day (L3) | 5-minute pause after 15-second limit state |
Exam Tip: Gotchas
Circuit breakers and LULD serve different purposes. Market-wide circuit breakers halt ALL trading when the S&P 500 drops 7%, 13%, or 20%. LULD halts trading in a single security when its price moves outside a percentage band. The exam may test whether a described halt is market-wide (S&P 500 trigger) or security-specific (LULD).