What Is Circuit Breaker?
Circuit breakers are pre-set thresholds that trigger trading halts when markets move too quickly. They exist at two levels: single-stock breakers (when an individual security moves outside a price band) and market-wide breakers (when major indexes decline by set percentages).
Market-wide circuit breakers: Level 1 (7% S&P decline) and Level 2 (13%) each halt all US equity trading for 15 minutes if triggered before 3:25 PM ET. Level 3 (20%) halts trading for the rest of the day. These were introduced after the 1987 crash and triggered during the COVID-19 March 2020 selloff.
Single-stock circuit breakers pause individual securities that move 5-10% in 5 minutes outside specific bands. The intent is to prevent fat-finger errors and crash cascades. Critics argue circuit breakers can amplify selling pressure when traders rush to exit before halts — there's no perfect solution to managing panic.
Related terms
- Trading Halt — Temporary suspension of trading due to news, volatility, or regulatory action.
- Volatility — A statistical measure of how much an asset's price varies over a period.
- Gap Up — Price opening significantly higher than the prior close, leaving a 'gap' on the chart.
- Market Capitalization — The total value of a company's outstanding shares: share price × total shares.