A regulatory mechanism that temporarily halts trading when a market or individual stock moves beyond a defined threshold, preventing panic-driven crashes from accelerating.
US equity market circuit breakers operate at both the market level and the individual stock level. Market-wide circuit breakers trigger trading halts across all exchanges when the S&P 500 drops 7% (Level 1 - 15-minute halt), 13% (Level 2 - 15-minute halt), or 20% (Level 3 - halt for the remainder of the trading day) from the previous close. These were triggered for the first time in decades in March 2020 during the COVID-19 crash, halting trading multiple times within a week.
Individual stock circuit breakers use the Limit Up-Limit Down (LULD) mechanism: if a stock moves more than a defined percentage (5% for S&P 500 stocks, 10% for others) from its average price over the preceding five minutes, trading is paused for five minutes to allow price discovery. This replaced the previous system that allowed single-stock flash crashes like the 2010 event where some stocks briefly traded at one cent.
For active traders, circuit breakers create specific considerations. When a halt occurs, existing limit orders are cancelled in some systems; open positions cannot be closed during the pause. The price at which trading resumes - the 'reopening price' - is set through an auction mechanism and can gap substantially from the pre-halt price. Strategies that rely on stop-loss orders assume continuous trading; gaps through stop levels during halted periods result in slippage on resumption.
Worked Example
On 9 March 2020, the S&P 500 opens down 7% as oil prices collapse and pandemic fears accelerate. At 9:31 AM ET, the Level 1 circuit breaker triggers - all US exchanges halt trading for 15 minutes. Traders who had stop-loss orders in place cannot exit during the halt. Trading resumes; the index closes down 7.6%. Three more Level 1 halts trigger that week. Traders holding long CFD positions with guaranteed stop-losses pay the premium for that protection - those with standard stops receive fills at the first available price after the halt, often gap-filling through their stop levels.