Recently, many people have been discussing U.S. stock market circuit breakers, but many investors still have a somewhat vague understanding of this concept. Today, let’s talk about what U.S. stock market circuit breakers really mean, and why the market needs this mechanism.

In simple terms, a circuit breaker means that when stock market volatility becomes too intense, the exchange will hit the pause button. Imagine you’re watching a horror movie and your heart is about to jump out of your chest, and suddenly someone presses pause for you—giving you 15 minutes to calm down. That’s the basic logic of the circuit breaker mechanism. In English, it’s called a Circuit Breaker, like an electrical circuit breaker: when the current becomes too large, it automatically cuts off the power to protect safety.

U.S. stock market circuit breakers are divided into three levels. A 7% drop in the S&P 500 index triggers Level 1, pausing trading for 15 minutes. If the market continues to fall to 13% on the same day, that’s Level 2, and it pauses again for 15 minutes. If it falls to 20%, that’s Level 3, and trading is closed for the day. This mechanism has been in place since 1988, with the goal of preventing investors from making irrational decisions in panic.

When it comes to the history of circuit breakers, October 19, 1987 is definitely a textbook case. The Dow Jones plunged 22.61% in a single day—falling by more than 500 points—and stock markets around the world crashed as well. It was this disaster that prompted regulators to establish circuit breaker mechanisms. Later, during the 1997 Asian financial crisis, it was triggered once, but the most memorable was the streak of four circuit breakers within a single month in 2020.

In early 2020, the COVID-19 pandemic broke out. At the same time, oil-price collapse was triggered by the breakdown of oil negotiations between Saudi Arabia and Russia, sending the market into extreme panic. On March 9, 12, 16, and 18, the S&P 500 index triggered Level 1 circuit breakers four times within just two weeks. At that time, many people said that Buffett has only seen five circuit breakers in his lifetime, yet we experienced four in one year. During that period, the Nasdaq fell 26% from its peak, the S&P 500 dropped 30%, and the entire market was being “wiped out.”

The purpose of the circuit breaker mechanism is to give the market and investors a chance to think calmly. When everyone is selling in panic, suddenly stopping trading can effectively prevent the market from spiraling further out of control. But on the other hand, some investors may actually become more nervous near the circuit breaker thresholds—worrying that after a circuit breaker is triggered they won’t be able to sell in time, which could further intensify volatility. So, circuit breakers have both pros and cons—the key still depends on the market environment.

Will circuit breakers happen again in the future? That depends on whether there will be major unforeseen events with low predictability, or whether economic data will bring changes that run counter to expectations. But rather than worrying about circuit breakers, it’s better to do your own risk management. When similar situations arise, the most important thing is to keep sufficient cash, ensure the safety of your principal and maintain capital liquidity—rather than blindly following the crowd to sell off. After all, in the long run, the ability to keep investing matters more than short-term ups and downs.