Market-Wide Circuit Breakers
When the entire market drops sharply, circuit breakers pause trading to prevent panic selling and give investors time to make informed decisions. There are two systems: market-wide halts (based on the S&P 500) and individual stock circuit breakers (Limit Up-Limit Down).
Market-Wide Circuit Breakers (S&P 500)
Circuit breaker levels are calculated daily based on the prior day's closing price of the S&P 500 Index.
| Level | S&P 500 Decline | Before 3:25 PM ET | At or After 3:25 PM ET |
|---|---|---|---|
| Level 1 | 7% | Trading halted for 15 minutes | No halt |
| Level 2 | 13% | Trading halted for 15 minutes | No halt |
| Level 3 | 20% | Trading halted for the remainder of the day | Trading halted for the remainder of the day |
Key Rules
- A Level 1 or Level 2 halt can only be triggered once per day at each level
- A Level 3 halt closes the market for the day regardless of the time
- These are market-wide halts: all equity trading stops across all exchanges and over-the-counter (OTC) venues
- FINRA Rule 6121 requires FINRA to halt all OTC trading in National Market System (NMS) stocks when exchanges initiate market-wide halts
- Circuit breakers only trigger on declines (not rallies)
Think of it this way: Circuit breakers work like a fire alarm in a building. When the alarm goes off, everyone stops what they are doing and regroups. The bigger the fire (7% to 13% to 20%), the longer the pause, and at 20% the building shuts down for the day.
Exam Tip: Gotchas
- 7%, 13%, 20%: these three S&P 500 decline thresholds are frequently tested
- Level 1 and Level 2 halts last 15 minutes; Level 3 closes the market for the day.
- After 3:25 PM ET, Level 1 and Level 2 declines do NOT trigger halts. Only a Level 3 (20%) decline halts trading after 3:25 PM.
Limit Up-Limit Down (LULD): Individual Stock Circuit Breakers
While market-wide circuit breakers address broad market crashes, LULD prevents extreme price swings in individual NMS stocks.
How LULD Works
- Price bands are set as a percentage above and below the stock's average reference price over the preceding 5-minute period
- If a stock's price hits the upper or lower band, it enters a Limit State
- If the price does not recover within 15 seconds, trading is paused for 5 minutes
- LULD applies during regular trading hours (9:30 AM to 4:00 PM ET)
LULD Tiers and Price Bands
| Tier | Securities Included | Price Band |
|---|---|---|
| Tier 1 | S&P 500, Russell 1000, select exchange-traded products (ETPs) | 5% (doubled in last 25 min of trading) |
| Tier 2 | All other NMS securities (excluding rights/warrants) | 10% for stocks >= $3; 20% for stocks $0.75-$2.99; lesser of $0.15 or 75% for stocks < $0.75 |
- Price bands are doubled during the last 25 minutes of the trading day for all Tier 1 stocks and Tier 2 stocks below $3.00
Exam Tip: Gotchas
- LULD's 15-second recovery window is different from the 15-minute market-wide halt. If a stock hits a price band, it gets 15 seconds to bounce back before a 5-minute trading pause kicks in.
- LULD price bands double in the last 25 minutes of trading (for Tier 1 and low-priced Tier 2 stocks), giving stocks more room to move near the close.
Market-Wide vs. LULD Comparison
| Feature | Market-Wide Circuit Breakers | LULD |
|---|---|---|
| Scope | All equities across all markets | Individual NMS stocks |
| Trigger | S&P 500 decline | Individual stock price move |
| Direction | Declines only | Both up and down |
| Thresholds | 7%, 13%, 20% | 5%, 10%, 20%, or $0.15 (by tier/price) |
| Halt duration | 15 min or rest of day | 5 minutes |
Exam Tip: Gotchas
- Market-wide circuit breakers only halt on DECLINES; LULD triggers on both up and down moves. This directional difference is a common exam question.
- Each Level 1 and Level 2 halt can only trigger once per day. If the market drops 7%, recovers, and drops 7% again, there is no second Level 1 halt.