🌰 In a nutshell: When the stock market is going crazy, a circuit breaker gives it a timeout.
📦 Unpack that a bit: If the market drops by a substantial amount in a single day — 7% from the prior day’s closing price for the S&P 500 — trading is automatically stopped for 15 minutes. The specifics of how big a drop triggers how long a timeout can be quite detailed. The idea is to give everyone a chance to take a deep breath, reflect on the situation, and hopefully stop any panicked selling.
👶 Tell a toddler: “When you get upset and I call a timeout, it’s so we can all calm down. Sometimes the stock market needs that, too.”
👊Why circuit breakers matter:
Stock markets are built to be responsive. Sometimes, they appear to be too responsive.
🖐The other hand: “Some academics say circuit breakers actually exacerbate selloffs because investors may see the market approaching a halt and sell in a panic to exit trades before the level is reached,” according to The Wall Street Journal. You know how telling someone to “just relax!” rarely works? Like that.
🔀 See also: Stock Market, S&P 500