What is a Circuit Breaker? Definition, Formula, and Example
A circuit breaker is a regulatory trading halt triggered when the S&P 500 falls by 7%, 13%, or 20% from the prior close, designed to pause panic selling and restore orderly price discovery.
Plain-English Definition
A circuit breaker is a coordinated, market-wide trading halt triggered when the S&P 500 declines by a predefined percentage from the prior session's close. The current three-tier framework was adopted by the SEC and the exchanges in February 2013 (Regulation NMS Rule 80B replacement) after the 2010 Flash Crash exposed weaknesses in the original 1988 system. Halts apply simultaneously to all U.S. equity, options, and equity-futures markets.
How Circuit Breakers Are Calculated
Three levels are based on the S&P 500 (SPX) decline from the prior trading day's close:
| Level | Threshold | Trigger Window | Halt Duration |
|---|---|---|---|
| 1 | 7% | 9:30 am – 3:25 pm ET | 15 minutes |
| 2 | 13% | 9:30 am – 3:25 pm ET | 15 minutes |
| 3 | 20% | Anytime during regular session | Trading closes for the day |
A Level 1 or Level 2 trigger after 3:25 pm ET does not halt the market — only Level 3 halts in the final 35 minutes. Each level can trigger only once per day; once Level 1 has fired, the next halt requires Level 2 (13%).
Single-stock halts use a separate Limit Up–Limit Down (LULD) framework: 5%/10%/20% bands around a 5-minute volume-weighted reference price, varying by tier and time of day.
Worked Example
The most recent broad-market circuit breakers fired during the COVID crash:
- March 9, 2020: SPX opened down 7.0% at 9:34 am ET. Level 1 triggered, halting trading for 15 minutes.
- March 12, 2020: SPX hit -7% at 9:35 am ET → Level 1 halt.
- March 16, 2020: SPX gapped down -8% at the open, hit -7% within a minute → Level 1.
- March 18, 2020: SPX dropped -7% at 12:56 pm ET → Level 1.
SPY, the S&P 500 tracking ETF, traded normally during the halts in pre-market and overnight futures, but cash-equity venues were dark. During each 15-minute halt, the order book is preserved; market makers re-quote during a 1-minute "auction phase" before resumption. Notably, no Level 2 (-13%) halt has fired since the 2013 framework was adopted.
When Traders Use It
Circuit breakers are not a tradable signal — they are an execution risk. Traders use them in three ways: (1) sizing positions to survive a 15-minute lockout where stops cannot fire and hedges cannot be re-balanced, (2) parking limit orders inside the LULD bands to capture mean-reversion when single-stock halts resolve, and (3) treating Level 1 events as macro tail-risk markers, since SPX has only triggered Level 1 nine times in the post-2013 framework — typically clustering around extreme events (COVID, August 2024 yen-carry unwind).
Limitations and Common Misconceptions
Circuit breakers do not stop selling — they delay it. SPX has resumed lower 6 of 9 times after Level 1 triggers since 2013, and pre-market and futures trading continue while cash markets are halted, allowing price discovery to reset before the resumption auction. Halts also do not protect retail orders already in the queue; market orders submitted during the halt execute against the resumption auction price, often far from the pre-halt level. Finally, circuit breakers and LULD halts are different mechanisms — a single stock halting on a -10% LULD breach does not pause the broader market, and an SPX-driven Level 1 halt overrides any in-progress single-stock halts.