After the October 1987 crash, the U.S. Securities and Exchange Commission introduced circuit breakers to pause trading after extreme declines.
Black Monday on October 19, 1987, saw the Dow Jones Industrial Average fall 22.6 percent, the largest one-day percentage loss in its history. The speed of the decline raised concerns that panic and automated selling could overwhelm normal price discovery. Regulators therefore developed mechanisms that temporarily halt trading when broad market losses reach specified thresholds.
These pauses are intended to give investors time to absorb information and allow liquidity to return. They do not guarantee that prices will recover or prevent future crashes. Modern U.S. rules use percentage-based thresholds for the S&P 500, with Level 1 and Level 2 halts during a trading session and a Level 3 halt that closes the market for the day.
The term “circuit breaker” can also describe limits on individual securities. It should not be confused with a margin call, which requires an investor to provide additional collateral after losses.