General Securities Sales Supervisor (Series10) Practice Exam

What market situation will trigger a circuit-breaker under the established rules?

1. Decrease of 10% in the Dow Jones Industrial Average

2. Decrease of 10% in the Standard and Poor's 500 Index

3. Increase of 10% in the Dow Jones Industrial Average

4. Increase of 10% in the Standard and Poor's 500 Index

The correct answer is: Decrease of 10% in the Standard and Poor's 500 Index

A circuit breaker is a temporary halt in trading on an exchange that is triggered by a significant decline in stock market prices. The purpose of a circuit breaker is to prevent panic selling and to give investors time to digest important information that might be affecting the market. Under the established rules for circuit breakers, a decrease of 10% in the Standard and Poor's 500 Index signifies a significant market downturn, which justifies a trading pause. This specific index is widely regarded as a key indicator of the overall U.S. stock market performance, and a decline of this magnitude suggests a severe loss of investor confidence. The reason a decline in the S&P 500 Index is particularly important is because it includes a diverse range of large-cap stocks, making it a broader measure of market performance compared to individual indices. This comprehensive representation means that when the S&P 500 decreases by 10%, it reflects widespread selling pressure across various sectors, warranting a trading halt to allow market participants to reassess their positions. In summary, the triggering of a circuit breaker by a 10% decrease in the S&P 500 Index effectively serves as a mechanism to stabilize the market during periods of heightened volatility and uncertainty.