Circuit breaker
Also known as: market-wide circuit breaker
A circuit breaker is a market-wide trading pause triggered automatically when a major index, typically the , falls a large percentage in a single session. The exchanges built these pauses into the market's rules after past crashes showed how a fast, self-reinforcing decline can spiral before anyone has time to assess what is actually happening. When the decline hits a set threshold, trading across the entire US halts for a fixed period, giving investors a moment to absorb the situation before trading resumes.
The system uses multiple thresholds, with the decline percentage that triggers each one growing larger through the trading day. A smaller decline early in the day triggers a shorter pause, while a severe decline can trigger a pause that lasts for the rest of the session. The exact percentage levels are set by the exchanges and reviewed periodically, but the underlying design has stayed consistent, pause trading, let information circulate, then let the market reopen and continue price discovery.
Circuit breakers are different from a on an individual , which pauses one security rather than the entire market. They are also a blunt tool, they do not fix whatever caused the decline, they only interrupt trading momentum long enough to prevent panic selling from on itself. For long-term investors, a circuit breaker event is mostly a sign of how a session has become, not a reason on its own to change an investment plan.