What is a Financial Circuit Breaker?

What is a Financial Circuit Breaker?

You may have recently heard the term Circuit Breaker used by the financial press. Here is some insight from LPL Financial about what it is and how it works.

What is a circuit break? A circuit breaker is a built-in temporary halt or momentary pause in trading in the stock market.

What are the triggers for a circuit breaker? There are three levels, or thresholds, at which trading will pause, and they are based on movement in the S&P 500 Index. Level 1 occurs when the S&P 500 declines at least 7% from its previous day’s closing price. Level 2 occurs if the index drops 13% from its previous day’s closing price. After each Level 1 and Level 2 threshold is reached, trading pauses for 15 minutes. If the index ever drops 20% from its prior day’s close, the Level 3 circuit breaker is enacted, at which point trading is discontinued for the rest of the day.

Why circuit breakers? The original intent of circuit breakers was to stop a market in free fall or prevent panic selling. By halting trading for a set amount of time, investors ideally can reassess market conditions. The time also allows investors to understand what’s happening in the market, for example, in the event of an impactful midday news alert.

Three Level 1 circuit breakers have been triggered over the past two weeks: March 9, March 12, and most recently on Monday, March 16. Circuit breakers remain an intentional aspect of the stock market, and ideally give time for buyers and sellers to be matched up more efficiently.