In-depth analysis of the US stock market circuit breaker mechanism: Why press the pause button during a market crash

Whenever the stock market experiences significant volatility, investors fear the market losing control the most. In the US stock market, there is a mechanism that can “save the day” at critical moments — this is the Circuit Breaker. Its function is similar to a circuit breaker in electrical systems, automatically pausing trading when market sentiment overreacts, giving everyone a chance to cool down.

How the Circuit Breaker Works

The name Circuit Breaker is quite illustrative. During regular trading hours (9:30 AM to 4:00 PM Eastern Time), if the S&P 500 Index drops by a certain percentage compared to the previous trading day’s closing price, trading will be forced to halt.

Specifically, the US stock market’s Circuit Breaker is divided into three levels, triggered as follows:

• Level 1 Circuit Breaker: Triggered when the decline reaches 7%, pausing trading for 15 minutes
• Level 2 Circuit Breaker: Triggered at a 13% decline, pausing trading again for 15 minutes
• Level 3 Circuit Breaker: Triggered at a 20% decline, stopping all trading for the day

It is important to note that Level 1 and Level 2 circuit breakers can only be triggered once per trading day. For example, if the S&P 500 drops 7% and then recovers, it won’t trigger the Level 1 circuit breaker again unless it reaches the 13% threshold for Level 2.

Additionally, if a circuit breaker is triggered after 3:25 PM, Level 1 and Level 2 pauses will not occur, only the Level 3 halt will be enforced.

Why Set Up Circuit Breakers? Look at Black Monday 1987

On October 19, 1987, the US stock market experienced a nightmare. The Dow Jones Industrial Average plummeted by 508.32 points in a single day, a decline of 22.61%, known as “Black Monday.” This crash quickly spread worldwide, with stock exchanges in various countries collapsing within hours, leading to a market-wide meltdown.

It was this catastrophic decline that prompted regulators to establish the first Circuit Breaker system. The purpose was clear — to prevent panic-driven, irrational mass sell-offs by investors.

When the stock market swings wildly, prices are often manipulated by emotions. The circuit breaker acts like pressing a pause button on the market, giving investors time to absorb new information and think calmly, rather than following the herd into selling.

Four Circuit Breaker Triggers in 2020 Pandemic

The most recent surge in circuit breakers occurred in 2020. Within just one month, the US stock market triggered Circuit Breakers four times — a rare event in history. Warren Buffett has witnessed only five circuit breaker events in his lifetime, yet we experienced four in one year.

The timeline is as follows:

• March 9: The S&P 500 drops over 7%, triggering a Level 1 circuit breaker
• March 12: Drops again over 7%, triggering another Level 1
• March 16: The third consecutive Level 1 trigger
• March 18: The fourth Level 1 trigger

By March 18, the Nasdaq had fallen 26% from its February high, the S&P 500 was down 30%, and the Dow Jones Industrial Average had dropped 31%.

The triggers were twofold: first, the oil market. In early March, the breakdown of production cut negotiations between Saudi Arabia and Russia led Saudi Arabia to increase oil production, causing international oil prices to crash. Second, the global spread of COVID-19. Countries implemented social distancing and gathering bans, nearly halting economic activity, reducing corporate revenues, and causing unemployment to soar. Investors worried about recession, rushing to safe assets, which triggered chain reactions of selling and shorting.

The Double-Edged Sword of Circuit Breakers

The positive effects of circuit breakers are clear: they can inject “calm” during the most chaotic market moments, helping some investors cool off and preventing further market chaos. They also protect investors from “Flash Crashes” — for example, the event on May 6, 2010, when high-frequency trading caused the Dow Jones to plunge by 1,000 points within minutes.

However, circuit breakers also have negative effects. Some investors, approaching the trigger point, may accelerate their sell-offs out of fear that once the circuit breaker is triggered, they won’t be able to sell in time. This behavior can increase market volatility and anxiety.

What to Do When Facing a Circuit Breaker

The possibility of the US stock market triggering a circuit breaker remains. Usually, triggers occur during unpredictable major events (like pandemics, wars) or when the market reaches a high point and then suddenly faces unexpected external shocks (such as policy changes or significant data downgrades).

If a circuit breaker occurs again, investors should stay rational:

1. Cash is king: Ensure sufficient cash reserves and liquidity; do not be overwhelmed by panic
2. Protect your principal: Prioritize capital safety over chasing returns
3. Think long-term: Sharp declines often present good buying opportunities, provided you have the capacity to continue investing
4. Avoid herd behavior: The 15-minute pause provides a perfect window for rational decision-making — don’t waste it

The purpose of the circuit breaker system is to maintain market stability. When it is triggered, it tests investors’ mental resilience. Knowing how to stay calm during crises is often more valuable than any investment skill.