Definition
Circuit breakers are regulatory mechanisms that temporarily halt trading when markets experience significant declines. In the U.S., market-wide circuit breakers trigger at 7%, 13%, and 20% drops in the S&P 500 from the previous close. Level 1 and 2 cause 15-minute halts, while Level 3 closes markets for the day. Individual stocks have their own circuit breakers under the Limit Up-Limit Down (LULD) rule. These mechanisms provide cooling-off periods during extreme volatility, preventing panic cascades.
Example
On March 9, 2020, the S&P 500 fell 7% shortly after market open, triggering a Level 1 circuit breaker and halting trading for 15 minutes. This allowed investors to reassess before markets resumed.
FAQ
What is Circuit Breaker?
Automatic trading halts triggered by severe market declines to prevent panic selling.
Why is Circuit Breaker important?
Circuit Breaker helps investors evaluate market structure and make more informed decisions.