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Explainer: How U.S. exchanges are prepared for possible post-election chaos

NEW YORK (Reuters) - Wall Street could see sharp swings in trading after the Nov. 3 U.S. presidential election. But there are safeguards in place to keep the stock market or equity futures from sliding out of control. Here is a guide to what exchanges do to halt trading if shares fall sharply.

FILE PHOTO: The Wall Street sign is pictured at the New York Stock exchange (NYSE) in the Manhattan borough of New York City, New York, U.S., March 9, 2020. REUTERS/Carlo Allegri

FUTURES MARKETS SAFEGUARDS

Price limits and circuit breakers are safeguards meant to stop a market from moving too far or too fast over a specific period of time, according to the CME Group CME.O, the world's biggest futures market operator.

In 2016, markets were betting on a win by Democrat Hillary Clinton and stock futures reacted violently here when it became clear late on election night that Republican challenger Donald Trump would become president.

S&P 500 futures ESc1, which trade on CME's Chicago Mercantile Exchange, plunged as investors scrambled to adjust positions. But once down 5%, the contract hit a price limit, meaning it could not trade lower, only sideways or up.

Price limits vary depending on the futures contract, but represent the maximum price range permitted for the contract to trade during each trading session.

CME’s equity index futures price limits during the overnight session are now set at 7%, from 5% previously, either up or down.

Circuit breakers are a kind of price limit, but are more dynamic.

For U.S. equities futures, if a contract moves more than 3.5% up or down within a 60-minute period during the overnight session, trading is paused for two minutes to give market participants a chance to cancel, modify or place new orders, before reopening.

Once reopened, the rolling one-hour time frame resets and the next level of circuit breaker comes into effect, and so on, until the hard 7% price limit is reached.

STOCK MARKET SAFEGUARDS

The U.S. Securities and Exchange Commission mandated the creation of market-wide circuit breakers to prevent a repeat of the Oct. 19, 1987, market crash, when the Dow plunged 22.6%.

Current guidelines mandate a 15-minute market-wide pause in all U.S. stocks if the S&P 500 index falls more than 7% before 3:25 p.m. New York time.

Another circuit breaker kicks in if the index’s decline hits 13% before 3:25 p.m., and trading is suspended for the session if the drop reaches 20%.

Circuit breakers were triggered here during the opening hour on March 9, 12 and 16 this year after the S&P 500 dropped 7% from its previous closing levels, and tripped later in the day on March 18, as coronavirus-driven volatility peaked.

WHAT IF AN EXCHANGE GOES DOWN?

On July 8, 2015, a technical glitch forced Intercontinental Exchange Inc's ICE.N New York Stock Exchange to suspend trading here for several hours. But trading continued as normal on the other 10 U.S. stock exchanges.

There are now 16 stock exchanges, as well as around 30 private stock trading venues run by broker dealers, where trading can take place.

In August 2013, a technical problem froze trading here in all Nasdaq-listed stocks for three hours, leading the SEC to call for a meeting of Wall Street executives to insure "continuous and orderly" functioning of the markets.

CAN THE ENTIRE MARKET BE SHUT DOWN?

On Oct. 29 and 30, 2012, markets were closed here after Superstorm Sandy, the worst storm to hit New York City in nearly 75 years. The NYSE closed its trading floor due to unsafe conditions in lower Manhattan.

The exchange had planned to go fully electronic, but with much of Wall Street unprepared for the transition and running on skeleton staffing, traders and regulators felt uncomfortable with the idea and it was shelved.

The markets have also closed due to other factors, including the Sept. 11, 2001, attacks, when markets were shuttered until Sept. 17 to avoid panic selling.

HOW PREPARED ARE STOCK EXCHANGES TODAY?

U.S. stock exchanges conduct regular testing of their systems, including for capacity and volatility issues.

Nearly all U.S. stock trading is done electronically, with only the NYSE still operating an open outcry trading floor for some trades. But the Big Board closed its floor for two months here at the outset of the pandemic and operated fully electronically without a hitch.

The SEC also introduced a rule called Regulation Systems Compliance and Integrity in 2014 to hold exchanges to a higher level of accountability over emergency preparedness, and the bourses do regular testing of their backup facilities.

Reporting by John McCrank; editing by Megan Davies and Leslie Adler

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