How Do Stock Market Circuit Breakers Work?
Trading halts are designed to give investors a chance to breathe when things get ugly. Here's how they function.
U.S. stocks had gone more than 20 years without a market-wide trading halt. We've now tripped the so-called circuit breakers two times in four days.
On Monday, March 9, the S&P 500 fell 7% within minutes of the open, triggering a market-wide trading halt for the first time since 1997. Thursday morning's plunge of more than 7% also tripped a circuit breaker.
Circuit breakers were first introduced after the Black Monday crash of October 1987. The Dow dropped almost 23% in a single session, which stands as a record to this day.
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Circuit breakers are intended to curb panic selling. Like calling a timeout in sports, a temporary pause in trading allows market participants to catch their breath, though it doesn't necessarily keep stocks from declining once trading resumes.
How Circuit Breakers Work
There are three levels of circuit breakers tied to how steeply the market declines:
- A Level 1 market-wide circuit breaker is tripped if the S&P 500 falls 7% from its previous close.
- A Level 2 circuit breaker comes into effect when the market plunges 13%.
- A Level 3 circuit breaker kicks in if the market tanks 20%.
A Level 1 or Level 2 breach halts trading for a minimum of 15 minutes. A Level 3 rout halts trading for the remainder of the trading day.
Level 1 and Level 2 circuit breakers can be triggered between 9:30 a.m. and 3:25 p.m. Eastern. A Level 3 breach can be triggered at any time.
Individual stocks also have circuit breakers, with the trigger levels determined by the price of the stock.
The circuit breakers have worked as intended this week, in that they've given traders a chance to at least catch up as markets tumble on the growing COVID-19 pandemic. Given that the outcome of this crisis is impossible to price in at this point, don't be shocked if we trip circuit breakers repeatedly in the sessions ahead.
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Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
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