Circuit Breaker

A circuit breaker is an exchange rule that halts or pauses trading automatically when prices move beyond a preset threshold in a short period. The SEC describes the market-wide version as a set of "procedures for coordinated cross-market trading halts if a severe market price decline reaches levels that may exhaust market liquidity." The purpose is not to stop prices falling, which a halt cannot do, but to interrupt a disorderly decline long enough for participants to assess what is happening and for orders to be reassembled in an orderly way.

Two distinct mechanisms operate in US equity markets and are often conflated. Market-wide circuit breakers, in rules such as NYSE Rule 7.12 and FINRA Rule 6121.02, halt trading in every stock at once and are keyed to the S&P 500. Limit up-limit down, a national market system plan, works stock by stock and pauses only the individual security. The same phrase also names something unrelated in state and local tax, where a property-tax circuit breaker is a relief measure that limits a household's property-tax bill by reference to its income. This page covers the trading halt.

The market-wide thresholds are percentages of the previous day's closing level of the S&P 500: 7 percent for Level 1, 13 percent for Level 2 and 20 percent for Level 3. Because they are recalculated daily, the point levels move with the index rather than sitting fixed for a quarter. A Level 1 or Level 2 decline reached after the open and before 3:25 p.m. Eastern stops trading market-wide for 15 minutes; the same decline reached at or after 3:25 p.m. stops nothing, on the reasoning that a short halt so close to the close would do more harm than good. Level 3 is different in kind: a 20 percent decline halts trading for the remainder of the session whenever it occurs. Level 1 and Level 2 halts may each occur only once a day, so a market that resumes after a Level 1 halt and then falls further will not stop again until it reaches Level 2.

That structure dates from 2012 and replaced an older one. Market-wide halts were first adopted in 1988 after the previous October's crash, keyed to the Dow Jones Industrial Average at 10, 20 and 30 percent, with the point levels set at the start of each calendar quarter from the prior month's average close and halts running from 30 minutes to two hours. The SEC approved the current design in Release No. 34-67090 of 31 May 2012, published at 77 FR 33531, which replaced the Dow with the S&P 500, cut the triggers to 7, 13 and 20 percent, shortened the halts to 15 minutes, moved recalculation from quarterly to daily, and reduced six trigger time periods to two. The order made the new rules operative on a pilot basis beginning 4 February 2013, and they were adopted on a permanent basis in 2022.

Older explanations of the 10, 20 and 30 percent Dow-based regime are still in circulation, including on an SEC investor bulletin that has not been updated since. Anything describing quarterly recalculation or a Dow trigger is describing the pre-2013 rules.

Limit up-limit down answers a different problem. Its price bands are set at a percentage above and below the average price of the stock over the immediately preceding five-minute period, so the reference point travels with the stock rather than being fixed at the prior close. If the price reaches a band and does not come back inside within 15 seconds, trading in that stock pauses for five minutes. The bands are 5, 10 or 20 percent, or the lesser of $0.15 or 75 percent, depending on the stock's price and its tier. Tier 1 covers the S&P 500, the Russell 1000 and selected exchange-traded products; Tier 2 covers all other national market system stocks, excluding rights and warrants. The bands apply from 9:30 a.m. to 4:00 p.m. Eastern and double during the last 25 minutes of the session for Tier 1 stocks and for Tier 2 stocks priced at or below $3.00.

How often does any of this fire? Market-wide halts are genuinely rare. The current thresholds were breached four times in a single month in March 2020, on the 9th, 12th, 16th and 18th, each a Level 1 halt. Single-stock pauses under limit up-limit down are far more common and mostly go unnoticed, because they affect one security at a time.

Before the session, the exchanges take the S&P 500's closing level from the previous day and publish the three point levels that correspond to declines of 7, 13 and 20 percent. During the session, if the index trades down through a level, the halt for that level applies across every US equity market at once, and the listing exchange runs a reopening auction when trading resumes.

A hypothetical illustration. Suppose the S&P 500 closed the previous session at 6,000. Seven percent of 6,000 is 420 points, so Level 1 sits at 5,580. Thirteen percent is 780 points, so Level 2 sits at 5,220. Twenty percent is 1,200 points, so Level 3 sits at 4,800.

If the index reaches 5,580 at 10:15 a.m., every US stock stops trading for 15 minutes and reopens at about 10:30. If it then falls to 5,220 at 1:00 p.m., there is a second 15-minute halt, because Level 2 is a separate breach with its own single use. If it slides to 5,580 again at 3:40 p.m., nothing happens: both the Level 1 breach and the time of day rule it out. Only a fall to 4,800 would stop trading again, and that one would close the market for the day.

What halts are designed to do

• Interrupt a decline that is feeding on itself, so orders can be re-entered and quotes rebuilt rather than executed into an empty book.
• Give every participant, including individual investors watching a phone, the same pause at the same moment.
• Coordinate across markets, so trading does not simply migrate to whichever venue has not stopped.
• Provide a known, published rule in advance, which is more predictable than discretionary intervention.

The honest objections

• A halt can attract volume rather than calm it, as participants rush to trade before the next threshold is reached.
• Pausing removes the option to sell at the moment an investor most wants it, and prices frequently reopen lower than where they stopped.
• The thresholds are wide enough that a very severe day can pass without one, which is exactly what happened on 6 May 2010 under the old rules.
• A market-wide halt does nothing about a decline confined to one stock or one sector, which is why limit up-limit down exists alongside it.