Understanding the US Stock Market Circuit Breaker in One Article: From Mechanism Principles to Practical Responses

Why Do US Stocks Need a “Safety Valve” Like Circuit Breakers?

What are the stock markets most afraid of? It’s not just a decline, but disorderly panic-driven drops.

On Black Monday in 1987, the Dow Jones Industrial Average plunged 22.61% in a single day, triggering a chain reaction of global stock market crashes. Since then, regulators realized the market needed an automatic “braking system”—the background for the birth of the US stock circuit breaker mechanism.

The core logic of the circuit breaker is simple: When investor sentiment spirals out of control, hit pause to give everyone a chance to cool down. There are three main benefits:

• Prevent the spread of panic: Pausing trading breaks the chain reaction of “herd selling”
• Avoid extreme pricing: Provides market participants time to reassess information, preventing severe price distortions
• Protect liquidity: Prevents “flash crashes,” where technical glitches or high-frequency trading cause irrational rapid declines

How Do US Stock Circuit Breakers Work? Three Levels You Need to Know

The S&P 500’s decline percentage determines the level and response of the circuit breaker:

Level 1 Circuit Breaker: 7% decline

• Trigger time: 09:30-15:25 trading hours
• Handling: All stocks pause trading for 15 minutes
• Exception: If triggered after 15:25, trading continues (unless it hits Level 3)

Level 2 Circuit Breaker: 13% decline

• Trigger time: 09:30-15:25 trading hours
• Handling: All stocks pause trading for 15 minutes
• Rule: Calculated within the same trading day with Level 1; no repeated triggers

Level 3 Circuit Breaker: 20% decline

• Trigger time: Any time during the trading day
• Handling: Trading halts for the rest of the day
• Impact: The strictest market pause, shutting down the entire exchange

Note a detail: Level 1 and Level 2 circuit breakers can only be triggered once each trading day. For example, if the S&P 500 drops 7% and triggers Level 1, after trading resumes, if it drops another 7%, it won’t trigger Level 1 again unless it falls to 13%, which would then trigger Level 2.

Historical Perspective: How Many Times Have US Stock Circuit Breakers Been Triggered?

Since their establishment in 1987, US stock markets have only triggered circuit breakers 5 times. What does this tell us? It indicates that truly market-shaking events are extremely rare.

1997 Asian Financial Crisis

• Dow Jones decline: 7.18% (Level 1)
• Duration: 15 minutes

2020 COVID-19 Pandemic Shock (4 consecutive circuit breakers)

• On March 9, 12, 16, and 18, the S&P 500 repeatedly triggered Level 1 circuit breakers
• In just two weeks, investors experienced 4 trading halts
• This was the most intense of the 5 circuit breaker events witnessed by Buffett in his lifetime

The 2020 situation was particularly profound. The global spread of COVID-19, oil price crashes, business shutdowns, soaring unemployment—multiple black swan events occurred simultaneously. By March 18, the Nasdaq had fallen 26% from its February high, the S&P 500 down 30%, and the Dow Jones Industrial Average down 31%. The market panic at that time was palpable.

The Double-Edged Sword of Circuit Breakers

Positive Effects

Circuit breakers can indeed cool overheated markets. During the 2020 downturn, the 15-minute pause allowed investors to digest government rescue measures and reassess corporate prospects, rather than blindly selling off. The timely actions of the US Treasury and Federal Reserve—including trillions of dollars in rescue plans and interest rate cuts—helped restore market confidence during these pauses.

Negative Effects

However, circuit breakers can also amplify panic. When investors realize the market “is about to circuit break,” they may preemptively sell heavily, fearing they won’t be able to exit at desired prices once trading halts. This “front-running” effect can increase volatility and sometimes accelerate declines.

In other words, circuit breakers are a double-edged sword: they can protect the market but also scare it.

Stock-Level Circuit Breakers vs. Market-Wide Circuit Breakers—Don’t Confuse Them

US trading halts operate on two levels:

Market-wide circuit breakers: Based on the overall movement of the S&P 500, as described above (Level 1, 2, 3).

Single-stock circuit breakers (LULD plan): For individual stocks experiencing extreme volatility

• When a stock’s price moves beyond a set threshold, trading for that stock is paused for 15 seconds
• If not normalized after 15 seconds, trading is halted for 5 minutes
• Purpose: To prevent high-frequency trading or data errors from causing extreme price distortions in a single stock

When Will the Next US Stock Circuit Breaker Occur?

Honestly, no one can predict precisely. But we can observe common conditions that trigger circuit breakers:

1. Low-predictability black swan events (pandemics, geopolitical conflicts, financial crises)
2. Counterintuitive policy shocks (e.g., market expects rate cuts but suddenly announces hikes)
3. Multiple negative factors stacking up (e.g., COVID-19 + oil price crashes + supply chain disruptions)

Looking at the current market environment, although the Fed’s rate hike cycle isn’t fully over:

• Tech stocks (especially AI boom) drove a rebound in 2023
• After the banking turmoil, the government acted swiftly to stabilize markets
• Market fears of recession haven’t yet reached critical levels

Therefore, the probability of triggering a US stock circuit breaker in the short term is relatively low, but that doesn’t mean it will never happen.

What Should Investors Do When US Stocks Hit a Circuit Breaker?

If you encounter such extreme market conditions, staying calm is more important than anything:

Mindset

• Circuit breakers are normal market protection mechanisms, not signals of doomsday
• Use the pause to reassess your investment logic, rather than making impulsive decisions

Operational Actions

• Cash is king: Ensure sufficient cash reserves to manage risks; don’t put all your funds into stocks
• Control leverage: If using margin or derivatives, immediately evaluate your risk exposure
• Diversify: Avoid over-concentration to reduce extreme losses from a single direction

Long-term Planning

• High-quality assets during panic often mark the bottom, but only prepared investors can seize these opportunities
• Accumulate diversified income streams and maintain ample cash flow to stay resilient during crises

Summary

The US stock circuit breaker system institutionalizes “calmness” through numbers and time rules: 7% pause for 15 minutes, 13% further pause, and 20% halt for the entire day. Since 1987, it has only been triggered 5 times, indicating that true market crises are exceedingly rare.

Investors should understand that the essence of circuit breakers—they are not punishment but protection. When markets overheat, they act like a timely splash of cold water, helping you wake up. Don’t panic when encountering a US stock circuit breaker; adhere to principles like “cash is king, control risks, think long-term,” which might even position you to seize rare opportunities.

In a complex macro environment, the smartest investment strategy is always to prepare for the next market shock.