On Oct. 19, 1987, the day ominously known as “Black Monday,” the Dow Jones Industrial Average (DJIA) plummeted a crippling 22.6 percent. To prevent such a violent single-day crash in the future, the U.S. Securities and Exchange Commission (SEC) implemented safety mechanisms meant to temporarily halt panicked sell-offs. The technical term is a “trading curb,” but most market-watchers call them “circuit breakers.”
For U.S. stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq, circuit breakers are automatically triggered when the S&P 500 stock index drops a certain percentage from its previous day’s closing price. Here are the three current levels of circuit breakers for U.S. stock markets and their consequences (NYSE and Nasdaq have the same levels):
- A “Level 1” circuit breaker is triggered by a 7 percent decrease from the S&P 500’s closing price. Trading is automatically halted for 15 minutes.
- A “Level 2” circuit breaker is triggered by a 13 percent decrease from the S&P 500’s closing price. Trading is automatically halted for 15 minutes.
- A “Level 3” circuit breaker is triggered by a 20 percent decrease from the S&P 500’s closing price. Trading is automatically halted for the rest of the trading day.
The decline needs to happen before 3:25 p.m. in order for trading to halt (the markets close at 4 p.m.) These mandatory halts are supposed to give traders time to stop and analyze new market conditions so they can make more level-headed decisions about whether to buy or sell. Regulators hope that if investors pause for 15 minutes, they’re less likely to panic.
The SEC set the current circuit breaker levels in 2012 after a stock scare known as the 2010 “Flash Crash,” in which the Dow Jones dropped 9 percent in a matter of minutes. Before 2012, the circuit breaker thresholds were higher (10 percent, 20 percent and 30 percent) and were based on changes in the Dow not the S&P 500. (Trading was also halted for longer periods then.)
Since all stock trading is done electronically, circuit breakers are programmed into exchanges like the NYSE and Nasdaq and automatically enforced when the thresholds are reached.
Single Stocks and Futures Limits
The three-level circuit breakers above are triggered by indexwide drops in the S&P 500, but there are also safety valves in place for individual stocks and the futures market.
If any individual stock — say, Apple or Walmart — either gains or loses 5 percent of its value in any five-minute period, trading in that stock only is automatically halted for five minutes. This circuit breaker only applies to stocks that are worth $3 or more at the start of the trading day. One additional caveat, since trading is especially volatile at the start and end of the trading day, the threshold for individual stocks is bumped to 10 percent in the first and final 15 minutes of trading.
In the U.S. futures market, which is separate from the equity and options markets, most off-hours trading in S&P 500 futures contracts is automatically halted when prices drop (or rise) 5 percent. There are, however, futures securities like the SPDR S&P 500 ETF Trust that aren’t subject to the 5-percent limit. On March 16, 2020, that unprotected fund lost 11 percent in one shot.
Circuit Breakers Worldwide
Many countries have their own exchanges and stock indices that also are programmed to pause if stock prices go south quickly.
Several Asian markets, for example, have circuit breakers in place. In China, if the index known as the CSI 300 drops or rises 5 percent, it triggers a 15-minute halt, and after a 7 percent loss or gain, trading is shut down for the day. South Korea pauses trading for 20 minutes if its Kospi or Kosdaq indices lose 10 percent. India has a three-tiered system in place at 10, 15 and 20 percent above or below the last closing trading for the day before.
Interestingly, Japan doesn’t have any circuit breakers in place for regular stock trading, but does halt trading on futures and options contracts if they reach upper or lower price limits.
In Europe, there are no market-wide circuit breakers like you’d find in the U.S. and Asia, but there are circuit breakers in place to prevent steep losses in individual stocks. On the London Stock Exchange (LSE), for example, individual stocks included in the benchmark FTSE100 index are protected by circuit breakers if trading drops 8 percent above or below the stock’s opening price.
Similarly, a large European exchange called Euronext (which operates stock markets in Oslo, Paris, Amsterdam, Brussels, Lisbon and Dublin) will halt trading for three minutes on an individual stock if its price drops or rises too quickly below or above certain thresholds. A source at Euronext told Fortune that individual-stock breakers work well for them and that a marketwide circuit breaker could increase volatility and uncertainty in trading.