Circuit Breakers

The whole unit has been about per-contract price limits. This final section covers a different tool that students constantly confuse with them: the broad, percentage-based circuit breaker. Keeping the two apart is the single most tested distinction here.

What a Circuit Breaker Is

A circuit breaker is a market-wide pause, not a boundary on one contract.

• Circuit breaker: a coordinated, market-wide trading halt triggered by a large percentage move, used especially in stock-index futures. It pauses trading for a set period so the market can reset, or closes it for the day at the most extreme level.
• Coordinated with the cash market: circuit breakers in futures are coordinated with the underlying stock market's circuit breakers, so the futures and cash markets pause together rather than one racing ahead while the other is frozen.

Think of it this way: a daily price limit is a fence around a single field (one contract). A circuit breaker is the main breaker switch for the whole building. When too much current runs through at once (a large percentage drop across the market), the master switch trips and everything on that circuit, the stock-index futures and the cash stock market alike, pauses together.

Exam Tip: Gotchas

• A circuit breaker is coordinated across markets; a price limit is per contract. The breaker trips the index futures and the cash stock market together. A daily price limit acts on one commodity or product on its own.

How Equity-Index Circuit Breakers Work

The equity-index circuit breaker is built as a set of percentage tiers, with a different consequence at each level.

• Three tiers: equity-index futures circuit breakers are commonly set at three levels of decline, roughly 7%, 13%, and 20%. Treat these as illustrative percentages, because exchanges revise the exact levels; the pattern (three escalating percentage tiers) is the durable idea.
• First two tiers pause, then resume: at the first two tiers, trading halts for a short period (for example, a 10-minute pause) and then resumes.
• Most extreme tier closes the market: at the deepest tier, the market closes for the trading day.
• Overnight limit: outside regular stock-market hours, a single percentage limit can apply where the market stays open but only trades up to that limit rather than halting.

Exam Tip: Gotchas

• The trigger is a percentage move, not a dollar distance. Circuit breakers key off a percentage decline in the index. That percentage basis is what separates them from a per-contract price limit, which is usually a fixed price distance from the prior settlement.
• The two lower tiers pause and resume; the top tier closes the day. A common trap treats every circuit breaker as an end to the session. The first two halt trading briefly and then let it restart; only the most extreme level shuts the market for the rest of the day.
• Overnight, the market can stay open but trade only up to the limit rather than halting. The daytime tiers halt trading; the overnight single limit caps the price without a full stop.

Circuit Breaker vs. Daily Price Limit

This is the comparison the exam returns to. Line the two tools up feature by feature and the trap answers stop working.

Think of it this way: a daily price limit is a speed limit on one road; you can drive anywhere up to it, and if the road jams with traffic all going one way, that single road can lock up. A circuit breaker is the citywide signal that flips every light to red at once when a major disruption hits, stopping the whole grid together for a set time.

Exam Tip: Gotchas

• The classic trap is confusing the two. A price limit is a per-contract daily price boundary (and can lock a single market). A circuit breaker is a broad, percentage-based, coordinated halt across index futures and stocks. If a question describes a market-wide pause tied to a percentage drop, it is a circuit breaker, not a per-contract price limit.