What are stock market circuit breakers?

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The S&P 500 plummeted more than 7 percent on Wednesday as the coronavirus roiled U.S. indexes, triggering so-called circuit breakers for the fourth time in less than two weeks.

The circuit breakers are intended to prevent further dropping.

According to the New York Stock Exchange, the equities and options exchanges all have procedures for coordinated trading halts if a severe market decline threatens to exhaust liquidity levels. The procedures, known as market-wide circuit breakers, may halt trading temporarily or, under extreme circumstances, close the markets before the normal close of the trading session.

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The circuit breakers are measured by single-day decreases in the S&P 500. A trading halt can be triggered at three thresholds that measure a decrease against the prior day’s closing price.

Level 1: If the S&P 500 drops 7 percent, trading will pause for 15 minutes
Level 2: If the S&P 500 plunges 13 percent, trading will again pause for 15 minutes if the drop takes place before or at 3:25 p.m. ET.
Level 3: If the S&P 500 falls 20 percent, trading will halt for the remainder of the day.

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The purpose of the circuit breakers, which are approved by the Securities and Exchange Commission, is to curb panic-selling.

March 9 was the first time that one of these circuit breakers, in their current form, have kicked in during regular trading hours. The rules were revamped in February 2013 after they failed to prevent the flash crash on May 6, 2010, which saw the Dow Jones Industrial Average drop by almost 1,000 points in just 10 minutes.

Although prices mostly recovered by market close, it prompted regulators to update the circuit breaker system.

“The market circuit breakers are designed to slow trading down for a few minutes, give investors the ability to understand what’s happening in the market, consume the information and make decisions based on market conditions,” New York Stock Exchange President Stacey Cunningham told CNBC. “This is operating as it’s supposed to.”

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