Quick definition Circuit breakers are automatic trading halts triggered when the stock market declines by a specified amount (e.g., 7 percent, 13 percent, 20 percent) from the previous day's close. They prevent panic selling during crashes. What it is Circuit breakers work like electrical circuit breakers; when the "circuit" overloads (prices fall too fast), the system shuts down temporarily. This gives traders time to process information and prevents chaotic downward spirals. In the US, the S&P 500 index triggers circuit breakers at 7 percent, 13 percent, and 20 percent declines from the previous close. The first two halts last 15 minutes; the last one (20 percent) halts trading for the rest of the day. Individual stocks also have circuit breakers that halt trading on that specific stock if it moves more than 10 percent in 5 minutes. Why it matters Circuit breakers were introduced after the 1987 stock market crash (Black Monday), when the market fell 22 percent in a single day. That crash demonstrated that without circuit breakers, panic selling can feed on itself, causing larger and larger declines. Circuit breakers give traders time to reconsider and prevent the worst outcomes. They are a crucial part of modern market infrastructure. Market reaction to circuit breaks When a circuit breaker halts trading, traders have 15 minutes to reconsider. During this time, information flows (news, analysis, reassessment). When trading resumes, prices have often stabilised or recovered partially. Market crashes still happen despite circuit breakers, but they are less severe than they would be without them. International circuit breakers Other exchanges have similar mechanisms. Circuit breakers vary by exchange and jurisdiction, but the principle is universal: halt trading temporarily to prevent panic. Practical example The S&P 500 declines 7 percent from the previous close. The circuit breaker halts all trading for 15 minutes. During the halt, companies announce financial support, central banks discuss stimulus, and traders reassess their positions. When trading resumes, the panic has subsided and prices have often recovered. If the decline continues and hits 13 percent, another 15-minute halt is triggered. See also - Trading Halt - Volatility - Market Crash - Stock Market Crash
