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Circuit Breakers and Other Market Volatility Procedures

The major securities and futures exchanges have procedures for coordinated market-wide trading halts if a severe market price decline reaches levels that may exhaust market liquidity. These procedures, known as circuit breakers, may halt trading temporarily or, under extreme circumstances, close the markets before the normal close of the trading session.

The circuit breakers provide for market-wide trading halts during a severe market decline as measured by a single day decrease in the Dow Jones Industrial Average (DJIA). There are three circuit breaker thresholds—10%, 20%, and 30%—set by the markets at point levels that are calculated at the beginning of each quarter. The formulas for these thresholds are set forth in the New York Stock Exchange (NYSE) Rule 80B.

For example, for the fourth quarter of 2010, the Level One (10%) circuit breaker is set at 1,050 points, the Level Two (20%) circuit breaker at 2,100 points, and the Level Three (30%) circuit breaker at 3,150 points. You can find the current thresholds for market-wide circuit breakers by visiting the NYSE’s Circuit Breakers webpage.

In addition to market-wide circuit breakers, the SEC approved market rules on a trial or “pilot” basis in 2010 allowing circuit breaker pauses for certain individual securities whose prices move 10% or more in a five-minute period. These circuit breaker pauses apply to stocks in the S&P 500 Index, Russell 1000 Index, and several hundred exchange-traded products, and halt trading in the applicable security in all U.S. markets for five minutes. U.S. exchanges and the Financial Industry Regulatory Authority (FINRA) proposed the rules in response to unusually volatile trading on May 6, 2010, that affected some stocks but was not broad enough to trigger the existing market-wide circuit breakers. This pilot is due to expire on January 31, 2012 unless exchanges and FINRA propose to extend the trial period or request permanent approval of the rules.

You can read more about the Stock-by-Stock circuit breakers in our Investor Bulletin on that topic.

http://www.sec.gov/answers/circuit.htm

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