A circuit breaker was introduced after the 1987 crash to pause markets during extreme price moves.
Circuit breakers are automatic trading halts or restrictions triggered by unusually large declines or advances. U.S. regulators developed them after Black Monday, when rapid selling overwhelmed market systems and deepened uncertainty. The goal is to give investors time to absorb information rather than forcing decisions during a disorderly rush.
Modern U.S. market-wide circuit breakers use percentage thresholds tied to the previous trading day’s S&P 500 close. A Level 1 decline pauses trading for 15 minutes when it reaches 7%, while a Level 2 decline at 13% also pauses trading for 15 minutes. A Level 3 decline at 20% ends trading for the day.
These rules are different from ordinary stock-specific trading halts. Circuit breakers do not prevent losses; they temporarily slow the market’s reaction to extreme conditions.