FINRA Describes "Guardrails" that Limit Market Volatility

In an Investor Insights article, FINRA described Single Stock Trading Pauses and Market-Wide Circuit Breakers—protections intended to maintain orderly trading during periods of extreme price swings. These guardrails address volatility as to individual securities and for the market as a whole.

Single Stock Trading Pauses: FINRA explained that trading in individual stocks can be temporarily halted to allow the market to process significant news or to address sharp price movements. FINRA said it participates with the exchanges in a "Limit Up/Limit Down Plan," in which trading pauses when a stock's price moves beyond specific price bands that are calculated as a percentage above and below its average price over the last five minutes. FINRA said that if a stock hits its upper or lower price band, it enters a "Limit State," and if the price does not stabilize within 15 seconds, trading pauses for five minutes. FINRA said the size of the price bands depends on whether the stock is classified as a "Tier 1" or "Tier 2" security and its previous closing price. 

Market-Wide Circuit Breakers: FINRA explained that all trading may be halted during severe market volatility to protect the broader market. These halts, which apply to all exchanges and listed stocks, including as to listed stocks traded OTC, are triggered by declines in the S&P 500 Index, relative to the previous day's close. FINRA said that when there is a 7 percent decline (Level 1), or 13 percent decline (Level 2), trading would be halted for 15 minutes (if it occurs before 3:25 p.m, but no halt if it occurs after that time). At a 20 percent decline (Level 3), trading is halted for the rest of the day, regardless of timing.