The three levels of US stock market circuit breakers, underlying mechanisms, and investor response guide

Background: Why Is a Circuit Breaker Necessary?

October 19, 1987, was a day that changed the history of the US stock market. On that day, the Dow Jones Industrial Average plunged 508.32 points in a single day, a drop of 22.61%—known as “Black Monday.” The chain reaction of the market spread globally, causing several stock exchanges to collapse within hours. This disaster prompted U.S. securities regulators to design an “emergency brake” system, which is the origin of the US stock circuit breaker mechanism.

During the COVID-19 pandemic in 2020, the US stock market experienced four circuit breakers within just one month—an astonishing frequency. From March 9 to March 18, the S&P 500 triggered the Level 1 circuit breaker four times. Throughout the entire history of the circuit breaker mechanism, aside from one triggered by the 1997 Asian financial crisis, most circuit breakers occurred during the pandemic. This fully demonstrates the important role of the circuit breaker mechanism in the market.

Core Mechanism of US Stock Circuit Breakers: Three Layers of Firewalls

What is the essence of the circuit breaker mechanism?

The English term “Circuit breaker” vividly illustrates this—just like a household circuit breaker trips automatically when overloaded, the US stock circuit breaker presses the “pause button” during extreme market volatility. When investor sentiment spirals out of control and irrational trading triggers panic selling, the circuit breaker mechanism forces a halt to market trading, giving all participants a chance to reflect calmly.

How does the circuit breaker operate in levels?

The US stock circuit breaker is divided into three levels, triggered by the percentage decline of the S&P 500 relative to the previous trading day’s close:

Level 1 Circuit Breaker: 7% decline

• Trading pauses for 15 minutes between 9:30 and 15:25
• Not triggered after 15:25 (unless a Level 3 circuit breaker is reached)

Level 2 Circuit Breaker: 13% decline

• Also pauses for 15 minutes, same time restrictions
• Only triggered once per trading day

Level 3 Circuit Breaker: 20% decline

• Stops all trading for the day immediately
• No time restrictions, takes effect instantly

A detail worth noting: Level 1 and Level 2 circuit breakers can only be triggered once each within the same trading day. For example, if the S&P 500 drops 7% and triggers Level 1, even if it drops another 7%, it won’t trigger Level 1 again; only a 13% decline (Level 2) can cause another pause.

The Double-Edged Sword of the Circuit Breaker

Protective side: Why does the market need circuit breakers?

During the COVID-19 pandemic, the circuit breaker mechanism demonstrated its value. Every time a Level 1 circuit breaker was triggered, the 15-minute “silence period” helped ease panic. Investors had the opportunity to reassess the situation rather than follow the herd into selling. This forced calm prevented the market from plunging into a “flash crash”—a catastrophic scenario where the index drops 1,000 points within five minutes, which occurred on May 6, 2010.

From a macro perspective, the circuit breaker mechanism prevents excessive market volatility, protecting small and medium investors from price distortions. Governments and regulators have never relaxed their focus on market stability.

Risk side: Could circuit breakers exacerbate anxiety?

But caution is also necessary. When investors realize that a certain price level will trigger a circuit breaker, they might sell off in advance near that threshold, fearing they won’t be able to close positions once the circuit breaker activates. This “front-running” behavior can increase market volatility and even trigger greater panic.

Review of Four Circuit Breakers During the 2020 Pandemic

In early 2020, the S&P 500 started declining from a high near 3400 points. Uncertainties about COVID-19, global supply chain disruptions, and the oil price war (Saudi Arabia vs Russia)—multiple factors combined, causing investor confidence to collapse.

After the first trigger of the Level 1 circuit breaker on March 9, the market didn’t stabilize. In the following trading days, whenever the index approached a 7% decline, new waves of panic ensued. By March 18, the S&P 500 dropped another 7%, triggering the fourth Level 1 circuit breaker. That week, the Dow Jones Industrial Average fell a total of 2,999 points, a decline of 12.9%. From the February high, the S&P 500 had fallen over 30%.

This period vividly illustrates the impact of black swan events—when an event’s scope exceeds everyone’s expectations, even the best protective mechanisms can only delay a crash, not prevent it.

Market-Wide Circuit Breakers vs. Individual Stock Trading Halts

The market needs to distinguish between two different suspension mechanisms:

Market-wide circuit breaker: applies to the overall decline of the S&P 500, an systemic emergency measure.

Individual stock trading halts (LULD mechanism): micro-level protection to prevent extreme volatility of single stocks. Exchanges set price limits; if a stock’s price breaks through the limit, it first enters a 15-second trading restriction. If not restored within 15 seconds, trading for that stock is halted for 5 minutes.

Both mechanisms complement each other to maintain market order.

Will There Be Future US Stock Circuit Breakers?

Circuit breakers usually stem from two types of events: a global black swan event (like a pandemic or war), or a sudden adverse surprise at high market levels (such as policy shifts or data deterioration).

Given the current macro environment, although the Federal Reserve is still in a rate hike cycle, market fears of recession haven’t yet reached the trigger point for circuit breakers. Earlier this year, AI tools like ChatGPT ignited enthusiasm for tech stocks, with the Nasdaq rising over 16% and the S&P 500 up more than 8% by mid-April. Governments are also working to stabilize expectations—when the banking crisis emerged in March, the U.S. Treasury quickly stepped in to backstop, and the Fed adjusted its rate hike pace.

How to respond if the US stock market hits the circuit breaker again?

The key strategy is “cash is king.” During periods of extreme market instability, protecting principal and liquidity takes precedence over seeking returns. The probability of finding quality investment targets is low because the entire market is in an irrational state. Smarter approaches include:

• Maintaining sufficient cash reserves to ensure liquidity
• Avoiding chasing highs or panic selling
• Gradually deploying capital into quality assets during dips (if you believe in long-term growth)
• Before macro conditions improve, focusing on building personal skills and diversified income sources

Summary

The US stock circuit breaker mechanism has become a standard feature of modern financial markets. From the helpless response to Black Monday in 1987 to today’s three-tier protection system, markets have learned from lessons. The 7%, 13%, and 20% thresholds reflect regulators’ attempt to balance “giving the market time to cool down” and “avoiding excessive intervention.”

If the US stock market hits the circuit breaker again in the future, there’s no need to panic excessively, but also no reason to be complacent. Maintaining a prudent attitude, prioritizing principal protection, and keeping sufficient cash reserves amid uncertainty are the right ways to navigate market cycles.