A circuit breaker is the trading rule introduced after Black Monday to pause markets during extreme declines.
The October 1987 crash revealed how quickly selling could overwhelm market systems. In response, U.S. regulators and exchanges developed mechanisms that temporarily halt trading when prices move beyond specified thresholds. These pauses are intended to give investors time to assess information and reduce disorderly panic.
Circuit breakers can apply to individual securities or to broad indexes. Their thresholds and procedures have changed over time, including revisions after later market events. In the United States, market-wide “Level 1,” “Level 2,” and “Level 3” halts are linked to percentage declines in the S&P 500.
A circuit breaker does not prevent prices from falling permanently, and it cannot eliminate underlying economic risk. Instead, it creates a short interruption in trading. The term is borrowed from electrical safety systems, where a breaker interrupts a circuit when current becomes dangerously high.