PEOPLE & EVENTS: Circuit Breakers, Black Monday, and the Flash Crash

On October 19, 1987 (“Black Monday”), the Dow Jones Industrial Average (DJIA) fell more than 22 percent in a single day. Although the exact causes of the crash are still debated, the SEC responded to the crash with a number of innovations, including circuit breakers. Circuit breaker rules require halts to all trading if the DJIA falls by a certain percentage within certain times. If, for example, the DJIA falls more than 10 percent within a trading day, then trading is halted for 1 hour if it's before 2:00 in the afternoon (the NYSE stops trading at 4:00). If it's between 2:00 and 2:30, then trading stops for 30 minutes (thus, ensuring at least 1 more hour of trading). If it is after 2:30, there is no halt. Longer halts (with different time limits) occur with a 20 percent drop. If the DJIA falls 30 percent, trading stops for the day. The idea is that such trading halts may reduce volatility by giving traders time to assimilate and process incoming information.