Foundations
Circuit breakers are automatic pauses in trading that trigger when prices fall too far, too fast. They exist because of flash crashes and panics: when selling feeds on itself mechanically, a forced stop gives humans time to think, information time to spread, and buyers time to return. They are the market’s equivalent of a fuse box.
The market-wide breakers
US equity markets halt trading when the S&P 500 falls 7 per cent from the previous close (Level 1) or 13 per cent (Level 2): each triggers a 15-minute pause if it happens before 3:25pm. A 20 per cent fall (Level 3) closes the market for the rest of the day. These thresholds were used in earnest during the March 2020 COVID crash, when Level 1 halts triggered four times in ten days: cascading falls that older readers of financial history will recognise from 1987, the crash that inspired the system.
Single-stock halts
Individual shares have their own guardrails. Limit-up/limit-down bands pause a stock that moves outside a price band (typically 5 to 10 per cent for large names) within five minutes. Volatility halts are routine on earnings days and during short squeezes; news-pending halts stop trading while companies release material information. A day with hundreds of single-stock halts is itself a signal of market stress.
Do they work?
The evidence is genuinely mixed, and commentary splits along a known fault line. Supporters say pauses break feedback loops and prevented worse in 2020. Critics point to the “magnet effect”: as prices approach a breaker, traders rush to sell BEFORE the halt, accelerating the very fall the mechanism is meant to stop. What is not disputed: breakers change trading behaviour around the thresholds, so knowing where they sit is part of reading any crash day.