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Circuit Breaker

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The stock market circuit breaker has the same purpose as the electric switch in most homes: to shut the system down when the load becomes too high, giving it time to cool off and prevent a meltdown. The load limited by the circuit breaker is rapid downward movement of prices. The circuit breaker is supposed to disrupt herd behavior and ease capacity constraints. The circuit breaker was conceived after subsequent investigation of the Black Monday sell-off of 1987 revealed that crashing computers, clogged phone lines, and other capacity bottlenecks exacerbated the decline. The first major test of the circuit breaker system occurred ten years later on another October Monday, when a drop in the Dow triggered first a 30 minute pause circuit breaker then an early close for the day. Today, the NYSE circuit breaker actions depend upon time of day and magnitude of market decline, whether 10, 20, or 30 percent. The circuit breaker triggers are revised quarterly to adjust for market level. Other US exchanges have similar circuit breaker procedures.

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