How Financial Markets Work: Behind the Scenes
Circuit Breakers and Market Crashes
How stock exchanges pause trading during sharp falls to prevent panic, where the idea came from, and how often circuit breakers have been triggered.
When markets fall very quickly, panic can feed on itself. To give investors time to think, many stock exchanges use circuit breakers: automatic pauses in trading when prices fall by a set amount.
Where the idea came from
On 19 October 1987, known as Black Monday, the U.S. Dow Jones Industrial Average fell about 22.6 percent in a single day, still its largest one-day percentage fall. Investigations suggested that automated selling and panic had fed each other. In response, U.S. exchanges introduced market-wide circuit breakers.
How they work in the United States
Today, U.S. market-wide circuit breakers are based on falls in the S&P 500 index:
- A 7 percent fall triggers a 15-minute halt.
- A 13 percent fall triggers another 15-minute halt.
- A 20 percent fall closes the market for the rest of the day.
Individual shares also have limits that pause trading when prices move too quickly.
India’s system
India’s exchanges use index-based market-wide circuit breakers at 10, 15 and 20 percent movements in the Sensex or Nifty, with halts of varying length depending on the time of day. Individual shares also have daily price bands.
Triggered in 2020
In March 2020, as the COVID-19 pandemic spread, U.S. market-wide circuit breakers were triggered four times within two weeks, on 9, 12, 16 and 18 March. India’s markets also hit a lower circuit on 13 March and 23 March 2020, halting trading.
Imagine investors watching prices plunge minute by minute. Some sell just because others are selling. A 15-minute halt gives everyone time to absorb news, check information and place orders more thoughtfully. When trading resumes, prices may continue falling, but the pause can reduce panic-driven selling based on fear rather than facts.
The debate
Supporters argue circuit breakers calm panics and give markets time to process information. Critics argue that as prices approach a threshold, traders may rush to sell before trading halts, a “magnet effect” that can speed up falls. Research on this is mixed.
Circuit breakers only pause trading. They cannot change the underlying reasons for a fall. After a halt, prices may keep falling if investors still see bad news ahead.
- Circuit breakers automatically pause trading during sharp market falls.
- They were introduced in the U.S. after the 1987 Black Monday crash.
- U.S. halts occur at 7, 13 and 20 percent falls; India uses 10, 15 and 20 percent thresholds.
- U.S. circuit breakers were triggered four times in March 2020.
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