## In-Depth Analysis of the US Stock Market Circuit Breaker: From Trigger Rules to Historical Events

When the US stock market experiences extreme volatility, a protective mechanism called the "Circuit Breaker" automatically activates. What exactly is this mechanism, why does it exist, and how does it influence investor decisions? Let's start with a market protection system that investors need to understand.

## Core Logic of the Circuit Breaker

**The Circuit Breaker** is essentially a "pause button" for the market. When the S&P 500 drops sharply in a single trading day, the New York Stock Exchange halts trading to give market participants time to react. This is not a market malfunction but a carefully designed risk control measure.

Imagine this scenario: sudden bad news triggers widespread selling, investors see stock prices plummet rapidly, more follow suit, creating a vicious cycle. At this moment, the circuit breaker acts like pressing the pause button in this "escape wave"—stopping everyone, allowing for information reassessment and calm judgment rather than being driven by emotion.

## How the US Stock Market Circuit Breaker is Triggered

The US stock market circuit breaker includes three levels of triggers, each corresponding to different declines and response measures:

**Level 1 Circuit Breaker: 7% Drop**
Triggered when the S&P 500 declines 7% compared to the previous trading day's close. Between 9:30 AM and 3:25 PM Eastern Time, all stock trading is paused for 15 minutes. If triggered after 3:25 PM, trading continues (unless the Level 3 is reached).

**Level 2 Circuit Breaker: 13% Drop**
If within the same trading day, the index drops to 13%, it triggers again. All trading is paused for 15 minutes (not paused after 3:25 PM unless the Level 3 is triggered). Note that the Level 1 and Level 2 circuit breakers can only be triggered once per trading day. For example, if the index drops 7% triggering Level 1, even if it drops another 7%, Level 1 won't trigger again; only a 13% decline will trigger Level 2.

**Level 3 Circuit Breaker: 20% Drop**
This is the most severe measure. When the index drops 20%, all trading for the rest of the day is halted. Regardless of when it occurs during the trading day, the market is completely closed.

This three-tiered mechanism embodies a risk management philosophy of gradual escalation: minor fluctuations allow for adjustment, while severe volatility prompts a forced halt.

## Why is the US Stock Market Circuit Breaker Necessary?

The circuit breaker was born from lessons learned in history. On October 19, 1987, the US stock market experienced "Black Monday"—a 22.61% plunge in the Dow Jones Industrial Average (a drop of 508 points). This disaster quickly spread to global exchanges. It was after this market crash that regulators established the circuit breaker.

Modern US stock circuit breakers serve three main purposes:

First, **prevent emotional outbursts**. During sharp declines, panic spreads rapidly. Halting trading can interrupt this chain reaction, giving investors time to digest new information and reassess the situation rather than being driven by herd psychology.

Second, **avoid flash crashes**. On May 6, 2010, a high-frequency trading algorithm malfunctioned, causing the Dow Jones to plunge 1,000 points within five minutes. Such extreme volatility distorts prices, making it impossible for investors to transact at reasonable prices. The circuit breaker can help restore market rationality during such sudden events.

Third, **maintain market structural integrity**. Unchecked sharp declines can damage the microstructure of the market, leading to liquidity shortages and quote chaos. The circuit breaker's orderly pauses protect the market's infrastructure.

## Review of Past US Stock Market Circuit Breaker Events

Since the circuit breaker was established in 1988, the US stock market has experienced five instances of triggering. The most recent and intense was the four consecutive circuit breakers in 2020, leaving a deep impression on global investors.

**October 27, 1997: Impact of the Asian Financial Crisis**
The Dow Jones fell 7.18%, triggering the Level 1 circuit breaker. The plunge was driven by the spread of the Asian financial crisis, with investors rushing to sell US stocks amid risk aversion. This event validated the effectiveness of the circuit breaker—after halting trading, market sentiment calmed.

**March 2020: The Four Circuit Breakers Triggered by COVID-19**
This was the most intense series of triggers since the mechanism's inception. Within just two weeks, the US stock market hit four circuit breakers:

- **March 9**: S&P 500 down 7.04%, triggering Level 1
- **March 12**: Down 7.6%, triggering Level 1
- **March 16**: Down 12.4%, triggering Level 1
- **March 18**: Down 7.1%, triggering Level 1

During these four days, the market shifted from uncertainty to panic. The global spread of COVID-19, economic shutdown risks, and unemployment expectations compounded, prompting investors to rush for the exits. Additionally, failed negotiations between Saudi Arabia and Russia over oil production led to a crash in oil prices, further undermining confidence.

By March 18, the Nasdaq had fallen 26% from its February high, the S&P 500 down 30%, and the Dow Jones down 31%. Despite the US government announcing trillions of dollars in rescue plans and liquidity expansion, initial effects were limited.

## The Dual Effects of the Circuit Breaker

While the circuit breaker was designed with good intentions, its actual effects are debated.

**Positive Effects:**
The circuit breaker effectively alleviates extreme volatility and provides a moment for reflection. During the COVID-19 pandemic, each time the market hit a circuit breaker, a technical rebound followed, indicating that halting trading helped some investors stop irrational selling. Moreover, the existence of the circuit breaker itself has a psychological effect—knowing a "breaker" exists, investors may be more willing to hold positions rather than panic-sell.

**Negative Effects:**
However, the circuit breaker can also intensify market swings. As prices approach the trigger level, some investors may accelerate selling to lock in losses, fearing they will be trapped if the market halts. This "front-running" behavior can accelerate declines, creating a self-fulfilling prophecy. In some cases, the circuit breaker delays the digestion of information, causing anxiety to accumulate and then explode upon resumption, leading to larger drops.

## Difference Between Market-Wide and Single-Stock Circuit Breakers

The US stock market has two systems of circuit breakers.

**Market-Wide Circuit Breakers** target the overall decline of the S&P 500, as discussed earlier with 7%/13%/20%. Once triggered, the entire market halts trading.

**Single-Stock Circuit Breakers** (LULD mechanism) address extreme volatility of individual stocks. Exchanges set a 5-minute price band for each stock; if the price moves outside this band, the stock enters a 15-second trading halt. If the price does not recover within 15 seconds, trading for that stock is paused for 5 minutes. This mechanism is more granular, preventing certain illiquid stocks from experiencing flash crashes due to technical glitches or large trades.

Single-stock circuit breakers mainly protect retail investors from black swan events, while market-wide halts serve as the last systemic safety net.

## When Might the Circuit Breaker Reoccur?

US stock market circuit breakers typically activate in three scenarios: sudden black swan events, significant divergence between economic data and expectations, and technical corrections after overvaluation.

Historically, the 1987 crash stemmed from technical failures and valuation bubbles; the 1997 crisis was due to international financial contagion; and the 2020 crash was triggered by the pandemic—a systemic shock that was largely unpredictable. Currently, although economic outlooks remain uncertain, the probability of triggering a circuit breaker solely based on fundamentals is low. The real risk lies in unpredictable exogenous events.

## How Should Investors Respond?

Regardless of whether a circuit breaker occurs, the core investment strategy remains: **maintain sufficient cash, ensure liquidity, prioritize capital safety**.

When a circuit breaker is triggered, selling is often not the best move. Historical data shows that rebounds after circuit breakers tend to be stronger than continued declines. The key is not to be driven by emotion—circuit breakers are signals for the market to "calm down." Moreover, such extreme volatility periods can create long-term investment opportunities—assets with solid fundamentals that have been unfairly punished.

## Summary

The establishment of the US stock market circuit breaker reflects progress in market regulation. Through its three-tier trigger system, it balances investor protection with market liquidity. Although not perfect and sometimes amplifying volatility, it has indeed changed the risk profile of the market.

Understanding how the circuit breaker works, its historical background, and its actual impact can help investors make more rational decisions in extreme market environments. Remember: the circuit breaker is not the end of the market but a self-protection device.