As the stock market bounces up and down, particularly on down days such as this, it helps to remember that trading stops are in place to prevent panic trading.

Following the 1987 stock market crash, regulators put in place so-called circuit breakers in hopes of softening future crashes. 

In general, stock market crashes are tremendously exacerbated by traders racing to sell securities in a bid to glean marginally higher prices for falling stocks than the next trader.  Economists commonly refer to such crashes as “races to the bottom,” because this selling process rapidly depresses stock values -- each trader sells for slightly less than the one before. 

Circuit breakers, or automatic trading stops, are designed to stem future selloffs by giving traders time to think about their trades before making them.  They also cut off computerized stock trading that often accelerates steep downturns. 

“By implementing a pause in trading, investors are given time to assimilate incoming information and the ability to make informed choices during periods of high market volatility,” according to the New York Stock Exchange’s Web site.

Presently, the New York Stock Exchange has three levels of trading halts. 

Level One

If the Dow Jones Industrial Average trades lower by 10%, or 1,100 points, a level one halt is initiated. If the halt occurs before 2:00PM Eastern time, stocks are halted for one hour; between 2:00 and 2:30 a 30-minute halt is initiated, and if it occurs after 2:30 there is no halt.

Level Two

If the Dow trades lower by 20%, or 2,200 points, a level two halt is initiated. If the halt occurs before 1:00PM Eastern time, stocks are halted for two hours, between 1:00 and 2:00 a one-hour halt is initiated, and if it occurs after 2:00 the market closes. 

Level Three

A level three halt is by far the most severe.  If the Dow trades lower by 30%, or 3,350 points, at any time, the market closes completely for the rest of the day.

Futures Markets 

Futures markets have similar, yet more complex, restraints on panic trading.  Trading of U.S. equity index futures, such as the Dow Jones Industrial Average, occurs on Chicago Mercantile Exchange [CME].  Futures, unlike stocks, are traded electronically on the CME Globex exchange nearly around the clock, and in the trading pits for about seven hours a day during weekdays.  

Each equity index future has its own "limit down" halting level for particular times of the day.  In overnight trading, for example, Dow Jones futures are only allowed to fall 550 points before circuit breakers come into effect.  Similarly, if S&P500 futures are only allowed to fall 60 points before circuit breakers are activated. 

Daytime halts mostly follow the New York Stock Exchange panic trading rules.  For example, if Dow Jones futures fall 1,100 points, trading can occur for 10 minutes at or above the limit level, and then is halted for two minutes if futures are still trading at the limit price.  Trading then resumes, but at the next limit level.

If Dow Jones futures continue falling to the 2,200 level, then the same situation repeats itself.  Trading is allowed to continue for 10 minutes above the limit level, and then is halted for two minutes if futures continue to be down by 2,200 points. Trading then resumes again until Dow futures trade lower by 3,350, at which point futures aren’t allowed to trade lower for the rest of the trading day. 

If levels do not come back from the 3,350 loss level by the close of trading in Chicago, electronic futures trading is delayed but does ultimately resume.  At that point the overnight limit down levels go into effect again. 

It is also worth noting that if trading on the New York Stock Exchange is halted for any reason, all domestic equity index futures and options are completely halted until trading resumes on the New York Stock Exchange.

More information on equity index futures trading limits is available here.

Charles Brady and Michael Goldstein contributed to this report.