RiskPicksWhat is a Circuit Breaker?
A circuit breaker is a market-wide trading halt that kicks in automatically when the S&P 500 drops by a certain percentage from the prior day's close. Circuit breakers exist to give traders and investors time to process information and prevent panic selling from spiraling out of control.
The three levels
- Level 1 (7% drop): trading halts for 15 minutes. If triggered after 3:25 PM ET, trading continues without a halt
- Level 2 (13% drop): trading halts for 15 minutes. Same 3:25 PM exception
- Level 3 (20% drop): trading halts for the rest of the day. No exception
Individual stock halts
Separate from market-wide circuit breakers, individual stocks can be halted by the exchange for several reasons:
- LULD (Limit Up-Limit Down): if a stock moves too fast in either direction, trading pauses for 5 minutes to let the order book stabilize
- News pending: the company requests a halt before a major announcement (earnings, merger, FDA decision)
- Regulatory halt: the SEC or exchange halts trading due to concerns about the stock
What to do during a halt
- Do not panic: halts are normal and happen multiple times per day across the market
- Cancel open orders: when the stock reopens, it may gap significantly from the halt price. Limit orders placed before the halt may fill at unexpected prices
- Wait for the reopen: the first few seconds after a halt reopen are extremely volatile. Many traders wait for the initial auction to settle before entering
Market-wide circuit breakers have been triggered only a handful of times. The most recent was March 2020 when COVID fears triggered Level 1 halts on four separate trading days within two weeks.