What Is a Circuit Breaker in Trading? How Is It Triggered?

The financial news ticker on your screen flashes increasingly dire updates. Commentators reach for the terminology of catastrophes—"crash," "freefall," "meltdown"—as an ominous red dominates every chart. Panic selling has accelerated, with major indexes pushing down past 3% and then 6%.

Then, trading stops completely. The market has hit a "circuit breaker." These tools, first instituted only a few decades ago in the U.S., automatically pause trading when market declines reach preset limits, providing a cooling-off period for investors while preventing the panic from taking on a life of its own.

Below, we explore how these safeguards work, what sets them off, and how they affect the financial markets.

Market-Wide Circuit Breakers

On March 9, 2020, with a pandemic spreading and a panic gripping Wall Street, the S&P 500 Index plummeted 7% within minutes of the opening bell, at which point trading was halted. This wasn't a glitch or a system failure. It was a circuit breaker in action, a financial fail-safe designed to prevent market meltdowns. Instituted after the infamous Black Monday crash of 1987 and triggered just once in October 1997, circuit breakers were tripped on four different trading days in March 2020.

In electronics, a circuit breaker is a safety device that trips and shuts down a circuit when it gets overloaded. Trading circuit breakers have a similar role—when the markets get overloaded with selling, they trip and temporarily halt trading to prevent a spiral of panic.

Since February 2013, market-wide circuit breakers are triggered by intraday declines in the S&P 500 index (previously, they were set to drops in the Dow Jones Industrial Average). The system has three levels:

• Level 1 (a 7% decline): Trading halts for 15 minutes
• Level 2 (a 13% decline): Trading halts for 15 minutes
• Level 3 (a 20% decline): Trading halts for the remainder of the trading day

For Level 1 and Level 2 circuit breakers, if the trigger occurs at or after 3:25 p.m., trading continues anyway. This is because, with only an hour left in trading, there's little to gain from a cooling-off period.

Limit Up/Limit Down Circuit Breaker

In addition to market-wide circuit breakers, there are also circuit breakers for individual securities, known as the limit up-limit down (LULD) mechanism. Unlike market-wide circuit breakers that only trigger on steep declines, LULD applies to both dramatic upward and downward price movements in individual stocks and shares of exchange-traded products (ETPs).

The size of the allowable price band depends on the security. In addition, to accommodate the typically higher volatility during market openings and closings, these price bands double in the final 25 minutes of the trading day (3:35 p.m. to 4:00 p.m. ET) for Tier 1 stocks and Tier 2 stocks priced at or below $3.

The table below outlines the trading ranges used for the circuit breakers for individual securities. If trading outside these bands persists for 15 seconds, activity is halted for five minutes. The reference price is calculated using the average price over the previous five minutes, and the maximum allowed pause is 10 minutes.

History of Circuit Breakers

Regulators put the first circuit breakers into place following the market crash that occurred on Oct. 19, 1987. That day, the DJIA shed 508 points—about 22.6%–in a single day. The crash, which began in Hong Kong and soon impacted markets worldwide, came to be known as Black Monday.

A second incident, the so-called flash crash of May 6, 2010, saw the DJIA drop almost 1,000 points in 10 minutes, though it rebounded minutes later. At that point, the biggest drop in history, the index lost almost 9% of its value within the hour. Over $1 trillion in equity evaporated, although the market regained 70% of the loss by the end of the day. However, the failure of the exchange-wide circuit breakers to halt the crash caused regulators to update the system.

Balancing Prevention and Restriction

Since being put in place following the 1987 Black Monday crash, circuit breakers appear to have largely fulfilled their objective: preventing catastrophic market meltdowns. The absence of similar-scale disasters in the decades since suggests a degree of success for these market safeguards. The financial system has weathered many storms, including the 2008 financial crisis and the 2020 COVID-19 market shock, without experiencing a total collapse akin to 1987.

However, critics still argue there are drawbacks or unintended consequences from their use. These critics tend to be among those who argue that any interference in markets could have calamitous effects. Recent studies have argued for these subtle ways circuit breakers influence the markets. They are worth examining since they help us analyze how circuit breakers work.

The Magnet Effect

The "magnet effect" is used by those who argue that the existence of a circuit breaker can make it more likely that the market will hit the trigger point. Several studies have shown how this would happen. Essentially, as it becomes clear trading might be halted, you get a rush of those trying to sell off before that happens, thus bringing the market even closer to the halting point.

Interference with Price Discovery

Critics have also argued that circuit breakers hinder the natural price discovery process. This aligns with arguments that these mechanisms may prevent markets from quickly reaching their true equilibrium price, potentially prolonging periods of volatility—not shortening them. These views are unsurprising since they are typical of those against regulatory efforts in the markets.

Contagion Paradox

When certain stocks in an index drop precipitously, that pushes the entire index closer to triggering the circuit breaker. This can cause otherwise unrelated stocks to decline in anticipation of a market closure, transforming what might have been risks among specific stocks into a systemic one.

This has led some to suggest that circuit breakers are best applied to individual stocks rather than market-wide indexes. Individual stock circuit breakers, they argue, would limit extreme moves in specific securities without creating artificial correlations or contagion effects across the broader market.

Forward-Looking vs. Backward-Looking Design

Traditional circuit breakers are backward-looking—calibrated based on historical price movements and volatility. However, research suggests that a forward-looking approach that accounts for expected future market conditions might be more effective.

Recent Market Volatility and the Circuit Breaker System

In the market chaos set off by the Trump Administration's April 2025 tariff announcements, U.S. markets narrowly avoided triggering circuit breakers amid volatility (the S&P 500 dropped 6% on April 4, just short of the 7% threshold). Meanwhile, circuit breakers for several international exchanges were set off.

Taiwan activated trading halts on April 7 when semiconductor giants Taiwan Semiconductor Manufacturing Company Limited (TSM) and Foxconn Technology Co., Ltd. plunged almost 10%. Japan's Nikkei 225 futures also temporarily suspended trading the same day after hitting its 8% circuit breaker threshold. The Japanese stock index last halted trading in August 2024, when it plummeted more than 12% in a single day. This led to sell-offs in other markets, including a sudden drop of 3% for the S&P 500.

The Bottom Line

Market circuit breakers are triggered when a stock index or individual security sees significant price movement, generally downward. The breaker pauses trading or halts it for the day, giving investors time to assess the market's condition and limiting the impact of panic selling. Though market-wide circuit breakers are triggered rarely, circuit breakers can be triggered more often for individual securities.