Circuit Breaker
A regulatory mechanism that temporarily halts trading market-wide when prices fall by specified thresholds, designed to prevent panic-driven crashes.
What is Circuit Breaker?
A circuit breaker is an automatic mechanism that halts trading on a stock exchange when prices fall by specified percentages within a single session, giving markets time to absorb information and preventing panic selling from cascading into a crash. In the US, the Securities and Exchange Commission and FINRA established market-wide circuit breakers after the 1987 Black Monday crash. Current NYSE and Nasdaq rules trigger a 15-minute halt when the S&P 500 declines 7% (Level 1) or 13% (Level 2) from the prior close, and a full-day halt if it falls 20% (Level 3). Individual securities also have circuit breakers under the Limit Up-Limit Down rule, which pauses trading in a single stock if it moves more than a set percentage in a five-minute window.
Example
On March 9, 2020, at the onset of the COVID-19 market selloff, the S&P 500 fell more than 7% at the open, triggering a Level 1 circuit breaker and halting all US equity trading for 15 minutes. Circuit breakers also activated on March 12 and March 16 — the first time the mechanism had been triggered three times in a week since its modern form was introduced after 1987.
Source: SEC — Circuit Breakers