Must-read for US stock market circuit breaker knowledge: Market protection mechanisms observed through four halts since 2020

If you witnessed the continuous circuit breakers in the US stock market in 2020, you might have personally experienced the madness of the investment market. Buffett has only seen the US stock market hit the circuit breaker five times in his lifetime, but that year we experienced four. What does this number represent? Why does the market need such emergency brakes? Today, let’s deeply analyze the US stock circuit breaker mechanism—this invisible firewall.

Historical Wake-up Call: From Black Monday to the COVID-19 Pandemic Shock

October 19, 1987, known as “Black Monday” in US history, the Dow Jones Industrial Average plummeted 508.32 points in a single day, a decline of 22.61%. At that time, there was no circuit breaker mechanism, leading to a chain collapse of global stock markets within hours. This painful lesson prompted regulators to establish the first US stock circuit breaker system.

Thirty-three years later, March 9 to March 18, 2020, panic triggered by the COVID-19 pandemic once again ignited the markets. In just 10 days, the S&P 500 created a record of four level-one circuit breakers—each triggered by a 7% decline—allowing people to witness firsthand what “market out of control” looks like. During that period, oil prices crashed, employment data worsened, and companies halted operations. Every bad news dominoed into a chain of sell-offs. By March 18, the Nasdaq was down 26% from its February high, the S&P 500 down 30%, and the Dow Jones Industrial Average down 31%.

What is the US stock circuit breaker? How does it work—more simple than you think

US stock circuit breaker (Circuit Breaker) core logic is straightforward: when market sentiment becomes overly inflated and price volatility spirals out of control, the trading system automatically hits the “pause button.”

During regular trading hours in Eastern Time 09:30-16:00, if the S&P 500 drops significantly compared to the previous day’s closing price, the market will automatically trigger a circuit breaker. This mechanism is divided into three levels:

Level 1 Circuit Breaker (7% decline) → Pause trading for 15 minutes
Level 2 Circuit Breaker (13% decline) → Pause trading again for 15 minutes
Level 3 Circuit Breaker (20% decline) → Trading halts for the day

It’s important to note that if a Level 1 or Level 2 circuit breaker occurs after 15:25, trading will not be paused (unless the Level 3 threshold is reached). Also, Level 1 and Level 2 circuit breakers can only be triggered once each trading day; even if the index drops another 7%, it will not trigger a second Level 1 circuit breaker.

Besides the overall market circuit breakers, there are individual stock circuit breakers (trading halt plans) for abnormal fluctuations of single stocks. When a stock’s price exceeds set limits, the market will impose a 15-second trading restriction. If not recovered, trading will be halted for 5 minutes.

Why set up this firewall?

The essence of the US stock circuit breaker is emotion management. When the stock market crashes, panic spreads rapidly like a virus—seeing massive sell-offs, investors instinctively follow suit, creating a vicious cycle. The “Flash Crash” on May 6, 2010, is a typical example: a trader’s high-frequency trading generated a large number of short positions in a short time, causing the Dow to plunge 1,000 points within 5 minutes. Such irrational volatility distorts prices and harms all market participants.

The circuit breaker setup has three main purposes:

1. Break the panic cycle — Enforce a cooling-off period for investors to reassess the situation instead of blindly following the crowd
2. Prevent systemic risk — Avoid further market out-of-control that could lead to economic recession
3. Protect market integrity — Reduce price distortions caused by irrational trading

Is circuit breaking beneficial or harmful?

The US stock circuit breaker is a double-edged sword.

Positive effects: During the 2020 pandemic shock, the four circuit breakers acted as a “stabilizer” for the market. The 15-minute pauses gave investors time to react and reassess, preventing a single-day plunge of over 20%, and also bought time for governments and central banks to implement policies.

Negative effects: However, anxiety near the circuit breaker thresholds can also intensify volatility. When investors see the index approaching a 7% decline, some rush to sell before the circuit breaker triggers, fearing they will be trapped if the market halts. This “front-running” psychology can accelerate the downward spiral.

Will there be more circuit breakers in the future?

The answer is: very likely. US stock circuit breakers typically occur in two scenarios—predictably unpredictable black swan events (like the pandemic) or unexpected external shocks (such as policy surprises). As long as market uncertainty persists, extreme volatility remains possible.

Given the current macro environment, economic recession fears still exist. If the market hits the circuit breaker again:

Investment mindset adjustments:

• Adopt a “cash is king” strategy, ensuring liquidity
• Prioritize capital preservation over chasing returns
• During circuit breaker periods, opportunities are limited; avoid rushing into the market

Long-term perspective: During market panic, ensuring continuous investment capacity is more important than short-term gains. Historical data shows that markets often rebound after circuit breakers, but only if you still have ammunition.

Summary

The US stock circuit breaker system originated from the painful lessons of “Black Monday” in 1987. The three-tier system (7%, 13%, 20%) through staged trading halts helps cool overheated market sentiment. While it cannot completely prevent declines, it effectively curbs irrational panic spreading and protects the market ecosystem.

Whether or not a circuit breaker is triggered, the core principle for investors remains: make rational decisions rather than follow emotions; prioritize capital safety over short-term gains.