Markets

'Limit down' to 'limit up': A week of scary trading halts, but this time for a surge

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Key Points
  • Futures contracts tied to the S&P 500 and Dow Jones Industrial Average implied an opening rally of 5% and triggered a "limit up" halt on Friday.
  • A day earlier, S&P 500 futures notched a "limit down" 5% threshold in premarket trading ahead of the open as investor sentiment deteriorated.
  • Equity futures also hit a similar "limit down" on Monday, when the Dow later fell more than 2,000 points, or 7.79%. 
Michael Nagle | Bloomberg | Getty Images

The stock market hit yet another trading halt on Friday as investors look to cap one of the wildest weeks in Wall Street history and parse through federal efforts to contain the coronavirus.

But unlike the prior stock halts in the past week, Friday's was thanks to a surge in buying instead of intense selling. 

Futures contracts tied to the S&P 500 and Dow Jones Industrial Average implied an opening rally of 5% and triggered a "limit up" halt at exchanges across the country.

What is 'limit down'?

In non-U.S. trading hours — that is before the 9:30 a.m. ET open of regular trading — stock futures are halted if they hit a downside or upside limit of 5%. In effect, the futures get "pinned" at the 5% limit and are unable to trade above or below the upper or lower bound, respectively, to ensure that opening trade is orderly and not emotional.

Such halts are unusual and occur only in times of extremely abnormal market volatility, so this week's frequent halts has left many investors exasperated.

S&P 500 futures notched a "limit down" 5% threshold in premarket trading ahead of the open on Thursday as investor sentiment deteriorated from uncertain to panicked over the impact of the coronavirus.

Both the Dow and the S&P 500 finished the regular Thursday session by clinching their worst daily losses since Black Monday, the infamous 1987 stock market crash that saw the S&P 500 fall more than 20%. The Dow fell 9.99% and the S&P 500 fell 9.5% on Thursday.

Equity futures also hit a similar "limit down" on Monday, when the Dow later fell more than 2,000 points, or 7.79%. 

What is a 'circuit breaker'?

Stocks also hit another type of trading halt this week known as a "circuit breaker," when the nation's top exchanges freeze trading during regular market hours between 9:30 a.m. ET and 4 p.m. ET when stocks fall sharply.

A market trading halt occurs at "three circuit breaker thresholds" on the S&P 500 due to large declines and volatility. Unlike the premarket "limits," circuit breaker halts apply only when equities sink; they do not stop trading for sharp rallies.

The rules, which apply to regular trading hours only, are as follows:

  • Level 1: If the S&P 500 drops 7%, trading will pause for 15 minutes.
  • Level 2: If the S&P 500 declines 13%, trading will again pause for 15 minutes if the drop occurs on or before 3:25 p.m. ET. There will be no halt if the drop happens after that.
  • Level 3: If the S&P 500 falls 20%, trading would halt for the remainder of the day.

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