Fast Market: What It Means, How It Works

What Is a Fast Market?

A fast market is a market condition that will be officially declared by a stock market exchange when the financial markets are experiencing unusually high levels of volatility combined with unusually heavy trading. Fast markets occur rarely, but when one does occur, brokers are not held to the same constraints as they are during a regular market. A fast market may occur because of positive or negative events.

How a Fast Market Works

When a fast market occurs for a specific security, it can cause a delay in the electronic updating of its last sale. Inexperienced investors are more likely to get burned in a fast market because of the unique problems that arise under such extreme trading conditions. Brokers may also not be able to fill orders when investors want or expect them to. As a result, their securities may be bought and sold at undesirable price levels that don't provide the return the investor anticipated.

Fast markets are rare and are triggered by highly unusual circumstances. For example, the London Stock Exchange (LSE) declared a fast market on July 7, 2005, after the city experienced a terrorist attack. Share prices were falling dramatically and trading was exceptionally heavy. 

Special Considerations

The Role of Circuit Breakers in Fast Markets

Circuit breakers were first introduced after the 1987 stock market crash. Originally, the circuit breaker rule halted trading in response to a 550-point drop in the Dow Jones Industrial Average, but in 1998, the trigger points were revised to become percentage drops. While early circuit-breakers used the Dow Jones Industrial Average as a benchmark, it is now the S&P 500 that determines whether trading will stop if a market starts moving too fast.

So-called circuit breakers are designed with the intent to help stem panic in the event of a fast market and a sharp decline in stock values. The criteria for triggering a market-wide trading halt are as follows:

• 7% decline in the S&P 500 before 3:35 p.m.: If the S&P 500 falls 7 percent from the previous session’s close before 3:25 p.m. ET, all stock-market trading halts for 15 minutes.
• 13% decline after stocks reopen: After stocks reopen, it would then take a 13 percent decline by the S&P 500 before 3:25 p.m. to trigger a second trading halt, which would also last 15 minutes.
• 20% decline after a second trading halt: After a second trading halt, it would take a decline of 20 percent to trigger a so-called Level 3 circuit breaker. Once a 20 percent drop occurs, trading is halted for the remainder of the day. Also note that after 3:25 p.m., stocks only stop trading in the event of a 20 percent drop.