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Mitigation strategies::Stock market crash

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Mitigation strategies One mitigation strategy has been the introduction of trading curbs, also known as "circuit breakers", which are a trading halt in the cash market and the corresponding trading halt in the derivative markets triggered by the halt in the cash market, all of which are affected based on substantial movements in a broad market indicator.<ref name="riskinstitute.ch">Riskinstitute.ch</ref>

United States

There are three thresholds, each of which represent different levels of decline in terms of points in the Dow Jones Industrial Average. These are computed at the beginning of each quarter to establish a specific point value for the quarter. For example, in the second quarter of 2011, threshold 1 was a drop of 1200 points, threshold 2 was 2400 points, and threshold 3 was 3600 points.<ref>NYSE.com</ref>

  • If threshold 2 is breached before 1 p.m., the market would close for two hours. If such a decline took place between 1 p.m. and 2 p.m., there would be a one-hour pause. The market would close for the day if stocks sank to that level after 2 p.m.
  • In the event where threshold 3 is breached, the market would close for the day, regardless of the time.

France

In France, daily price limits are implemented in cash and derivative markets. Securities traded on the markets are divided into three categories according to the number and volume of daily transactions and price limits vary depending on the category to which the security belongs. For instance, for the more liquid category, when the price movement of a security exceeds 10% from the quoted price at the close of the previous market day, quotation is suspended for 15 minutes. After 15 minutes, transactions are resumed. If the price then goes up or down by more than 5%, transactions are again suspended for 15 minutes. The 5% threshold may apply once more before transactions are halted for the rest of the day. When transactions are suspended in the cash market on a given security, due to undue price movement, transactions on the option based on the underlying security are also suspended. Further, when more than 35% of the capitalization of the CAC40 Index is unable to be quoted, the calculation of the CAC40 Index is suspended and the index is replaced by a trend indicator. When less than 25% of the capitalization of the CAC40 Index is able to be quoted, quotations on the derivative markets are suspended for half an hour or one hour when additional margin deposits are requested.<ref name="riskinstitute.ch"/>


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Mitigation strategies
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