Recently, I’ve been going through some historical events in the U.S. stock market and found the topic of circuit breakers to be quite interesting. Many people have heard of the circuit breaker mechanism, but not many truly understand it. Today, I’d like to talk with everyone about what this mechanism is all about.

Simply put, a circuit breaker is like a circuit breaker in an electrical circuit. When market sentiment overreacts and stock prices fluctuate especially violently, trading is paused for a period of time, giving investors a chance to catch their breath. The purpose of doing so is very clear: to prevent the market from falling into irrational panic-driven selling and to avoid prices becoming completely distorted.

U.S. stock market circuit breakers are divided into three levels. A 7% drop in the S&P 500 triggers Level 1 and pauses trading for 15 minutes. A decline of 13% triggers Level 2, and trading is paused for another 15 minutes. If the drop reaches 20%, that is Level 3, and trading stops immediately for the day. This mechanism takes effect during trading hours from 9:30 to 15:25. If Level 1 or Level 2 is triggered after 15:25, trading will not be paused—unless Level 3 is reached, in which case trading will stop.

Why set up this system in the first place? History has the answer. On October 19, 1987—the infamous Black Monday—the Dow Jones Industrial Average plunged by more than 22% in a single day, directly triggering a global stock market crash. It was this disaster that led regulators to decide to establish the circuit breaker mechanism. Later, during the 1997 Asian financial crisis, the Dow fell 7% again, triggering the first Level 1 circuit breaker.

Most people should still remember the more recent record of U.S. stock market circuit breakers from 2020. With the outbreak of the COVID-19 pandemic, combined with a sharp drop in oil prices, the market collapsed instantly. In just two weeks, the S&P 500 triggered 4 circuit breakers. On March 9, 12, 16, and 18—almost every few days. The degree of panic during that period was truly hard to imagine. Even Buffett has only experienced circuit breakers 5 times in his lifetime, while we went through 4 of them in a single year.

The circuit breaker mechanism is a double-edged sword. On the one hand, it can indeed cool down the market and prevent irrational stampede-style selling. But on the other hand, some investors, seeing that a circuit breaker is about to be triggered, become even more anxious and rush to sell before the halt—thereby actually increasing volatility.

When it comes to individual stocks, the U.S. stock market also has another mechanism called the limit-up/limit-down plan. If a single stock’s price fluctuates beyond a preset range, trading is first limited for 15 seconds. If it still hasn’t recovered, trading is paused for 5 minutes. This is intended to prevent certain stocks from experiencing sudden extreme volatility.

Will circuit breakers happen again in the future? I think they definitely will. As long as there is a market, there will be unpredictable black swan-type events. Pandemics, abrupt geopolitical shifts, and reversals in economic data—all of these can trigger market panic. The key is how to respond. My advice is: once a circuit breaker happens, don’t panic—stay rational. Keep enough cash on hand to ensure liquidity. Protecting your principal is always the top priority. In moments of extreme market panic, things are often also at their best opportunities—but the prerequisite is that you must survive to see that moment.

Looking back on these U.S. stock market circuit breaker records, we can see both the market’s resilience and the weaknesses of human nature. The original intention of establishing the circuit breaker mechanism is to protect the market, but ultimately, it still comes down to investors’ own rational judgment.