When the US stock market suddenly halts: An in-depth analysis of the circuit breaker mechanism

The U.S. stock market does not operate entirely freely. When stock prices fall too rapidly, the market automatically hits the brakes—that’s the core logic of the circuit breaker mechanism. Many investors have seen circuit breakers in action in the U.S. stock market, but they may not fully understand how they work. This time, we will explain the circuit breaker mechanism from an investor’s perspective.

What exactly is a circuit breaker? An analogy of an electrical switch

Circuit breaker (Circuit Breaker) is a very vivid name. Just like the circuit breaker at home automatically trips when the current is too high to protect the entire electrical system, the U.S. stock market’s circuit breaker mechanism follows the same logic—when market sentiment spirals out of control and stock prices fall too quickly, the exchange will automatically press the pause button.

Why pause? Because in extreme panic, investors often cannot make rational decisions. Everyone is selling off, and if you follow suit, you might not have time to think clearly about why you’re selling. The circuit breaker mechanism forcibly allows everyone to cool down for 15 minutes—absorbing new information, adjusting their mindset, and reassessing the situation.

How is a circuit breaker triggered? Three critical thresholds you must know

The S&P 500 index is the trigger indicator for the circuit breaker mechanism in the U.S. stock market. Currently, there are three levels:

Level 1 Circuit Breaker: Down 7%

• Trigger condition: S&P 500 drops 7% compared to the previous trading day’s closing price
• Consequence: The entire market pauses trading for 15 minutes
• Time restriction: Only effective between 09:30 and 15:25; if the 7% decline occurs after 15:25, no pause will be triggered that day

Level 2 Circuit Breaker: Down 13%

• Trigger condition: Within the same trading day, the S&P 500 accumulates a 13% decline
• Consequence: Trading pauses again for 15 minutes
• Important rule: Level 1 and Level 2 circuit breakers can only be triggered once per trading day; after reaching Level 2, Level 1 will not trigger again

Level 3 Circuit Breaker: Down 20%

• Trigger condition: S&P 500 drops 20%
• Consequence: Trading halts immediately for the day, no negotiations
• No time limit: Whenever the 20% decline is reached, the market closes immediately

In simple terms, the larger the decline, the longer the market is locked. Levels 1 and 2 are just pauses, while Level 3 is a direct market shutdown.

Why establish a circuit breaker mechanism? Lessons from history are too profound

On October 19, 1987, the U.S. experienced “Black Monday.” The Dow Jones Industrial Average plunged 22.61% (a drop of 508 points) in a frenzy of selling, triggering a chain reaction of global stock market crashes within hours.

At that time, there was no circuit breaker mechanism. No one could press the stop button. Investors, exchanges, and regulators were completely overwhelmed by market forces. Prices distorted, trading became chaotic, panic spread—the market turned into an uncontrollable machine.

Because of this lesson, the U.S. regulatory authorities established the first circuit breaker in 1988. The purpose was simple: prevent market sentiment from spiraling out of control and causing the price discovery mechanism to collapse.

Another warning case occurred on May 6, 2010. A trader used high-frequency trading to create a large number of short positions in a short period, causing the Dow Jones to plunge 1,000 points within 5 minutes—that’s the famous “Flash Crash.” If the circuit breaker mechanism we have today had been in place then, perhaps the losses wouldn’t have been so severe.

The dual nature of circuit breakers: they protect but also hurt

How circuit breakers protect the market

The original intent of the circuit breaker mechanism is impeccable: giving panicked investors 15 minutes to breathe. During this period, you can:

• Rationally interpret the latest market information and news
• Reassess your portfolio risks
• Avoid being hijacked by surrounding panic emotions

Historically, multiple circuit breakers have temporarily alleviated market sentiment. On March 9, 2020, the U.S. stock market fell 7% due to the COVID-19 pandemic, triggering a Level 1 circuit breaker. After a 15-minute pause, investors had the chance to calm down and think, avoiding even more extreme sell-offs.

Hidden harms of circuit breakers

But investors must also be aware that circuit breakers can sometimes backfire:

When the trigger point is about to be hit, some investors accelerate their selling—worried that once the circuit breaker activates, trading might be halted and they can’t exit in time. This “front-running” behavior can actually accelerate the market decline in both speed and magnitude. Before the circuit breaker is triggered, the market may already be self-accelerating into a crash.

Additionally, the pause itself can increase investor anxiety—during the 15 minutes when the market is locked, no one can trade, and no one knows the true price. This uncertainty can sometimes be more panic-inducing than the decline itself.

The nightmare of 2020: four circuit breakers in one month

The most recent extreme case is 2020. In just two weeks, the U.S. stock market triggered 4 circuit breakers—an extremely rare event in history.

Timeline review:

• March 9: S&P 500 drops 7%, Level 1 circuit breaker
• March 12: S&P 500 drops 7%, second Level 1 circuit breaker
• March 16: S&P 500 drops 7%, third Level 1 circuit breaker
• March 18: S&P 500 drops 7%, fourth Level 1 circuit breaker

Why did this happen? Because two black swan events occurred simultaneously:

COVID-19 impact The pandemic suddenly erupted, and humanity knew nothing about the virus. Response measures were unclear. Countries implemented social distancing and lockdowns, causing economic activity to halt. Unemployment soared, corporate revenues plummeted, supply chains broke down. Investors started questioning: will the economy go into recession? Can companies still profit?

Oil price crash In early March, negotiations between Saudi Arabia and Russia over oil production failed. Saudi Arabia increased oil output, causing international oil prices to fall below $30 per barrel from over $50. Energy stocks collapsed, igniting the first spark of the stock market plunge.

The combination of these two factors plunged the market into total panic. 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%.

Even with the U.S. government announcing massive rescue funds and promising to support corporate loans, it could only provide temporary reassurance. Because what people face is an uncertain future—no one knows how long the pandemic will last or when the economy will recover.

Market-wide circuit breaker vs individual stock halts: don’t confuse them

The U.S. stock market has two mechanisms for halts:

Market-wide circuit breaker Triggered by the overall decline of the S&P 500, affecting all stocks, pausing the entire exchange. This is a response to large-scale market crises.

Single stock trading halt (LULD mechanism) For abnormal volatility of individual stocks. If a stock’s price moves too rapidly within a short period (usually exceeding upper and lower limits), the exchange will impose a 15-second trading restriction. If trading does not normalize within 15 seconds, the stock is halted for 5 minutes.

The latter is designed to prevent manipulation or algorithmic trading failures of a single stock, without affecting the normal trading of other stocks.

Will there be another circuit breaker?

In the short term, the possibility of the U.S. stock market triggering a circuit breaker again always exists. Because the fundamental trigger condition is—investor panic and fear sharply rising.

When is panic more likely?

First, unpredictable black swan events (like COVID-19, earthquakes, escalating wars), second, unexpected economic data (people expect economic improvement, but the data shows recession), third, policy shocks (sudden interest rate hikes, trade war escalation, geopolitical tensions).

In the current macro environment, the risk of recession is still widely discussed. If similar sudden events like a pandemic occur again, or economic data drops significantly beyond expectations, a circuit breaker is not impossible.

What should you do if you encounter a circuit breaker?

Mental preparation First, understand: a circuit breaker is not the end of the world. It is just a market self-protection mechanism. Historically, after each circuit breaker, the market eventually recovers, although it may take time.

Cash is king When a circuit breaker occurs, don’t rush to buy the dip. Ensure you have sufficient cash and liquidity to cope with further declines. During economic downturns, good investment opportunities are actually few; rather than rushing in, it’s better to stay patient.

Avoid chasing highs and lows Circuit breakers often happen during extreme panic. Making investment decisions at such times is very prone to errors. Better to miss some opportunities than to make impulsive decisions driven by emotion.

Reassess your risk tolerance A circuit breaker is a reminder: check whether your portfolio exceeds your risk capacity. If a single decline can make you panic, your position might be too heavy.

Summary

The circuit breaker mechanism reflects a deep understanding of market risks in modern capital markets—some mechanism must exist to interrupt the spread of irrational emotions. From Black Monday in 1987 to the pandemic crash in 2020, circuit breakers have been triggered time and again, reminding investors that market risks are real.

Understanding the three levels of circuit breakers (7%, 13%, 20%), knowing when they trigger and how they operate, is essential knowledge for every serious investor. But more importantly, one must realize that circuit breakers are neither saviors nor doomsdays—they simply pause the market for 15 minutes, testing investors’ mindset and decision-making skills.

When facing the next possible circuit breaker, being mentally prepared, maintaining sufficient cash, and avoiding emotional decisions are the most practical strategies.