Circuit Breaker
Quick Definition
Automatic trading halts triggered when stock indices or individual securities experience rapid price declines, designed to prevent panic selling.
Key Takeaways
- Automatic trading halts at 7% (Level 1), 13% (Level 2), and 20% (Level 3) S&P 500 declines
- Implemented after the 1987 Black Monday crash to prevent panic selling
- Individual stocks have separate Limit Up-Limit Down (LULD) mechanisms
- Triggered four times during the March 2020 COVID-19 selloff
What Is Circuit Breaker?
Circuit breakers are regulatory mechanisms that temporarily halt trading on stock exchanges when prices decline by specified percentages, providing a cooling-off period to prevent panic-driven market crashes. For the broader market, the SEC's Rule 80B sets three levels for the S&P 500: Level 1 (7% decline) triggers a 15-minute halt, Level 2 (13%) triggers another 15-minute halt, and Level 3 (20%) halts trading for the remainder of the day. For individual stocks, the Limit Up-Limit Down (LULD) mechanism pauses trading when a stock's price moves beyond specified percentage bands from its average price. Circuit breakers were first implemented after the October 1987 "Black Monday" crash when the Dow fell 22.6% in a single day. They were triggered multiple times during the COVID-19 selloff in March 2020.
Circuit Breaker Example
- 1On March 9, 2020, the S&P 500 fell 7% within minutes of opening, triggering a Level 1 circuit breaker — the first since 1997.
- 2Circuit breakers were triggered four times in March 2020 as COVID-19 fears caused unprecedented market volatility.
- 3After the 1987 Black Monday crash (Dow -22.6%), regulators implemented circuit breakers to prevent future single-day collapses.
Related Terms
SEC (Securities and Exchange Commission)
The primary U.S. federal agency responsible for regulating securities markets, protecting investors, and enforcing federal securities laws.
FINRA
A self-regulatory organization that oversees broker-dealers and their registered representatives in the United States.
Compliance Officer
A professional responsible for ensuring a financial institution adheres to all applicable laws, regulations, and internal policies.
Pattern Day Trader
A trader who executes four or more day trades within five business days in a margin account, triggering a $25,000 minimum equity requirement.
Insider Trading
The illegal practice of trading securities based on material, non-public information obtained through a position of trust or confidence.
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
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