Circuit Breaker Halt

This article provides additional context around how circuit breakers work, the rationale behind them, the historical background, the ongoing debate over their effectiveness, and the specific procedures across different market venues. The goal is to give a more comprehensive picture beyond just defining circuit breakers.

What are Circuit Breakers?

Circuit breakers are pre-determined trading halts that kick in when a stock or market experiences extreme volatility and price declines. As defined by the SEC, the purpose is to “allow investors to reassess their positions calmly” and prevent further panic selling that could destabilize markets. They essentially provide a pause or reset during major sell-offs.

Circuit Breaker Trigger Levels

There are two main types of circuit breakers based on thresholds set by regulators.

  • Market-wide circuit breakers halt all equity trading when the S&P 500 falls 7%, 13%, and 20% from the prior day’s close.
  • On the other hand, single stock circuit breakers temporarily halt trading in a specific equity if it rises or falls more than 10% in a 5-minute span.

Circuit Breaker Trading Halts

When a market-wide circuit breaker is triggered, all trading is paused for a set duration, depending on the decline level. At 7% and 13%, there is a 15-minute trading halt. At 20%, equity trading is halted for the remainder of the day. This is meant to provide a cooling-off period and reset orderly trading.

In addition, if a circuit breaker for a specific stock is triggered, the stock is typically halted for 2 minutes and resumes trading thereafter. However, if there was specific news triggering the sharp move, it can happen that the stock gets halted all day.

History and Regulation of Circuit Breakers

Circuit breakers were adopted by the SEC in 1988 after the Black Monday crash of 1987, when the Dow fell over 20% in one day. The current levels were updated after the May 2010 Flash Crash. They are a regulatory tool to maintain fair and orderly markets during extreme volatility events.

Pros and Cons of Circuit Breakers

Supporters argue circuit breakers reduce selling pressure by providing a pause to digest information and prevent overreactions. Critics contend they can actually amplify panic as traders try to sell ahead of potential halts. There is debate about whether they are an effective stabilizing force.

Circuit Breakers by Exchange

While the market-wide circuit breaker rules are set by the SEC, each exchange like the NYSE and Nasdaq, has specific procedures and designated times when halts are enacted. Futures exchanges like the CME Group also have circuit breakers tailored to their asset classes. Brokers must clarify trading implications for clients.

Alexander Voigt, CEO
Article by
Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.