## Four Circuit Breaks in One Month? How the US Stock Market Circuit Breaker Mechanism Works and How Investors Should Respond

For most investors, March 2020 was unforgettable. In just one month, the US stock market experienced four circuit breakers, an extremely rare event in history. Even legendary investor Warren Buffett has only seen five circuit breakers in his long investing career, highlighting the severity of this event. So, what exactly is the circuit breaker mechanism? Why does it happen? And how should investors respond?

### The Core Logic of the Circuit Breaker Mechanism

To understand the US stock market circuit breaker mechanism, it can be likened to a circuit breaker in electrical systems. When the current becomes too high and causes a short circuit, the breaker immediately cuts off power to protect the entire system. Similarly, when the stock market experiences irrational and violent fluctuations, and investor sentiment spirals into panic selling, the circuit breaker will automatically activate, pausing market trading to give all participants a moment to think calmly.

During US trading hours (Eastern Time 9:30-16:00), if the S&P 500 index drops significantly compared to the previous trading day's closing price, trading will be paused for 15 minutes or halted entirely for the day, depending on the magnitude of the decline.

### The Three Levels of Circuit Breakers Explained

The US stock market circuit breaker mechanism is divided into three levels, triggered as follows:

**Level 1 Circuit Breaker** — Triggered when the decline reaches 7%. At this point, the S&P 500 drops 7%, and the market pauses trading for 15 minutes. However, if this occurs close to the market close (between 15:25-16:00), trading continues and no pause is initiated.

**Level 2 Circuit Breaker** — Triggered when the decline reaches 13%. If within the same trading day, the index falls another 13% from the previous day's close, trading is paused again for 15 minutes. Similarly, if this occurs after 15:25, trading continues unless the third level is triggered.

**Level 3 Circuit Breaker** — Triggered when the decline reaches 20%. Once the index drops 20%, all trading for the day is halted immediately, regardless of the time.

This three-tier setup was officially established after 1988; prior to that, the US stock market experienced even more severe crashes.

### Historical Memory: Black Monday and the 2020 Continuous Circuit Breakers

When talking about the US stock market circuit breakers, one cannot ignore Black Monday on October 19, 1987. On that day, the Dow Jones Industrial Average plummeted 22.61%, a staggering decline. This unprecedented crash triggered a chain reaction across global securities markets, prompting regulators to establish the circuit breaker mechanism to prevent similar disasters from recurring.

The most recent large-scale circuit breaker event occurred in 2020. As the COVID-19 pandemic spread globally, investor panic about the economic outlook reached its peak. From March 9 to March 18, within just two weeks, the S&P 500 triggered four Level 1 circuit breakers:

- March 9: Pandemic fears led to a sell-off, activating the first Level 1 circuit breaker
- March 12: Another drop exceeding 7%, triggering the second circuit breaker
- March 16: Continued panic, third circuit breaker activated
- March 18: Despite government rescue policies, confidence remained low, triggering the fourth circuit breaker

Behind this event were two main factors: first, the oil price crash (caused by failed negotiations between Saudi Arabia and Russia leading to a plunge in international oil prices), and second, the uncertainty surrounding COVID-19. Disruptions in global supply chains, factory shutdowns, surging unemployment, and investor risk aversion led to widespread stock sell-offs. 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 Real Impact of Circuit Breakers: A Double-Edged Sword

The original purpose of implementing circuit breakers in the US stock market was to alleviate market panic and maintain stability. In an ideal scenario, pausing trading indeed provides investors with time to digest information and adjust their mindset, preventing emotions from spreading rapidly and causing greater losses.

However, in reality, the circuit breaker mechanism also has negative effects. When investors see the market approaching a circuit breaker threshold, they may accelerate selling out of fear that once triggered, they might not be able to exit in time. This anticipatory panic can further increase market volatility, ultimately having the opposite effect.

### The Difference Between Single Stock and Market Circuit Breakers

It is worth noting that the US stock market also has **individual stock circuit breakers** (trading halts), which differ from the overall market circuit breaker. These are mainly aimed at extreme price movements of a single stock. If a stock's price fluctuates excessively within a short period, the exchange will impose a 15-second trading restriction. If the stock does not recover within 15 seconds, trading for that stock will be halted for 5 minutes. This is to prevent extreme price distortions caused by high-frequency trading or extraordinary events.

### Will Circuit Breakers Reoccur in the Future? How Should Investors Respond?

Historically, US stock market circuit breakers tend to occur in two scenarios: one is unpredictable major black swan events (such as pandemics, financial crises), and the other is negative shocks after market peaks that defy expectations.

If circuit breakers are triggered again in the future, investors should avoid being misled by short-term volatility. The most prudent strategy is **cash is king** — maintain sufficient liquidity, delay new investments, and wait until market sentiment stabilizes before seeking opportunities. Remember, market crashes are often when panic is at its highest, and investment decisions made during such times are most prone to error. Protecting principal should always be the top priority.

### Summary

The US stock market circuit breaker mechanism has evolved from nothing to a well-optimized system. The three-tier circuit breaker provides multiple layers of protection, pressing the pause button when investor sentiment spirals out of control. Whether it was Black Monday in 1987 or the four consecutive circuit breakers in 2020, these events remind us: market volatility is an objective reality, and rational decision-making is more important than blindly following the crowd. When circuit breakers are triggered, the real test begins — how to stay rational amid volatility is a crucial lesson every investor must learn.