China crisis: What are US stock circuit breakers?
Nasdaq 100 September futures NQc1 were halted in premarket trading on Monday after falling to 3,992.25, marking a 5pc drop in overnight hours.
According to CME Group, the equity index price limits are designed to coordinate with circuit breaker provisions the New York Stock Exchange has in place.
The New York Stock Exchange implemented circuit breakers in response to the market crashes in October 1987 and October 1989, in order to "reduce volatility and promote investor confidence" according to the NYSE's website.
The NYSE replaced the Dow Jones Industrial Average DJI with the S&P 500 .SPX as the benchmark to determine when circuit breakers are triggered.
Circuit breakers are broken into three levels, with a level 1 halt coming after a 7-percent drop and a level 2 halt being triggered after a 13-percent fall. Both of those circuit breakers would result in a halt for all stocks from trading for 15 minutes should they occur between 9:30 a.m. EDT and 3:25 p.m. EDT.
A level 3 circuit breaker occurs when the market falls by 20 percent, which would halt trading for the remainder of the day.
Each circuit breaker can only trigger once per day. Once the market reopens after a level 1 halt, the breaker would not trigger unless stocks fell further to trigger a level 2 halt.
A level 2 halt would not be re-triggered after the market reopens unless the market were to trigger a level 3 halt, and trading would cease until the next trading day.