Recently, a friend asked me about the US stock market circuit breakers, and I realized that many people don't fully understand this mechanism. Today, I want to share my observations.

Speaking of the US stock market circuit breaker system, it's actually like a circuit breaker in an electrical circuit. When the current becomes too high, it automatically trips to protect safety. Similarly, when market sentiment overreacts or experiences large fluctuations, the circuit breaker will hit pause, giving everyone a moment to cool down. I especially like the analogy of watching a horror movie to explain this—when the heart can't take it, pause for 15 minutes to slow the heartbeat, clear the mind, and then continue.

How exactly does it work? During normal trading hours (9:30 AM to 4:00 PM Eastern Time), if the S&P 500 drops 7% in a single day, a Level 1 circuit breaker is triggered, pausing trading for 15 minutes. If it drops 13%, that's a Level 2 circuit breaker, pausing again for 15 minutes. If it hits 20%, that's a Level 3 circuit breaker, and trading stops for the day. However, there's a detail—if these conditions occur after 3:25 PM, trading will continue (unless the Level 3 threshold is reached).

Why have a circuit breaker system in the US stock market? Mainly to prevent the market from spiraling out of control. The most frightening example I’ve seen is the 2010 "Flash Crash"—a trader used high-frequency trading to create a massive number of short positions in a short period, causing the Dow Jones Industrial Average to plummet 1,000 points in five minutes. Without circuit breakers to pause trading, the consequences could have been disastrous.

Historically, since the circuit breaker system was established in 1988, there haven't been many instances of it being triggered. The most famous was Black Monday on October 19, 1987, when the Dow fell 22.61%. At that time, there was no such mechanism, which led to a global stock market crash. It was only afterward that the US circuit breaker system was officially put in place.

The most recent large-scale trigger was in March 2020. With the outbreak of COVID-19 and oil prices crashing, the US stock market hit the circuit breaker four times within two weeks. I remember the panic during that period— the S&P 500 once dropped 30%, the Dow fell 31%, and the Nasdaq declined 26%. The circuit breaker did help calm the markets at that time, but some also argued that as prices approached the trigger points, investors became more anxious and accelerated selling.

So, is the US stock market circuit breaker good or bad? Honestly, it has pros and cons. It can prevent the market from spiraling further out of control and give investors time to react, but it may also increase market volatility. However, from a long-term perspective, this mechanism is still necessary.

Will there be another circuit breaker in the future? It's hard to say. Usually, circuit breakers are triggered in two scenarios—one is during unpredictable black swan events (like a pandemic), and the other is when the market reaches high levels and suddenly faces unexpected external shocks. Given the current macroeconomic uncertainties, the possibility of triggering the circuit breaker again cannot be ruled out.

If a circuit breaker does happen, my advice is not to panic. Stick to a cash-preservation strategy, ensuring the safety of your principal and liquidity. In such market environments, good investment opportunities become even more valuable. Protect your ability to continue investing—that's the top priority.