What is a Trading Curb?

Trading curbs are restrictions that are placed on a given security or a market for a specified period of time. Sometimes known as a collar or circuit breaker, this temporary restriction in trading is usually invoked when there is a need to halt or curb a dramatic drop in the value of the security or securities concerned. From this perspective, the use of a trading curb can be viewed as a means of providing a cooling down period for the market to re-stabilize.

The method of implementing a trading curb may occur in one of two different ways. First, the curb could invoke a temporary halt to all trading in the market for a short period of time. During this period, no securities of any type can be purchased or sold. The second approach calls for the temporary suspension of trading on specific securities, while other securities that meet the so-called tick test may be traded on an uptick.

Whether the trading curb is an across the board halt of trading or involves a specified number of securities depends a great deal on what is happening with the market. If there is a general drop in value that threatens to create a panic, all trading may be suspended. This can allow investors time to investigate the reasons behind the drop in more detail and possibly allay fears about the future performance of the stocks. When the issue seems to center around a given security or group of securities, the trading curb may be somewhat localized and have little to no impact on other securities traded on the market.

One key issue with any trading curb is the degree of volatility involved with the current situation. If the level of volatility threatens to negatively impact the balance of the marketplace, the trading curb may be employed as a means to either minimize the impact of what has already begun to take place or to prevent the imbalance from occurring.

Since “Black Monday” in 1987, several markets have implemented a trading curb policy that may be invoked when certain sets of circumstances develop. For example, the New York Stock Exchange in the United States has a curb plan that relates to program trading. In the event that the composite index used by the NYSE moves more than 190 points from the previous close of the market, the curb will remain in effect for the duration of the trading day, unless the gain or loss in points falls under 90 points. This action helps to stabilize program trading on the market, and prevent the recurrence of another panic situation.