How Do Stock Market Circuit Breakers Work?

(Image credit: 2008 Getty Images)

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.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

The 11 Best (And 11 Worst) Stocks of the 11-Year Bull Market

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.

The 12 Best ETFs to Battle a Bear Market

TOPICS

Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

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 markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.