Understanding Stock Market Circuit Breakers

You might have seen during the last few weeks people have mentioned the stock market decline triggered the circuit-breaker, but you might have no idea what that means. Given how important they are, I wanted to provide a high-level overview. Please let me know if you have any questions and feel free to share in the comments section if you think they are a good idea.

Circuit-breaker points represent the thresholds at which trading is halted market-wide (total U.S. stock market) for single-day declines in the S&P 500 Index. Circuit breakers halt trading on the nation's stock markets during dramatic drops and are set at 7%, 13%, and 20% of the closing price for the previous day. The circuit breakers are calculated daily.

Level 1 halt: A level 1 halt occurs if the stock market drops 7% of the closing price for the previous day. Trading will halt for 15 minutes if drop occurs before 3:25 p.m. If it occurs at or after 3:25pm, trading shall continue. 

Level 2 halt: A level 2 halt occurs if the stock market drops 13% of the closing price for the previous day. Trading will halt for 15 minutes if drop occurs before 3:25 p.m. If it occurs at or after 3:25pm, trading shall continue.

Level 3 halt: A level 3 halt occurs if the stock market drops 20% of the closing price for the previous day. At any time during the trading day—trading shall halt for the remainder of the trading day.

The circuit breaker has been triggers 3 times over the last 2 weeks, although only the level 1 halt.