Circuit Breakers and Sidecars, Fully Explained
— Trigger Conditions, Trading-Halt Duration, and How to Respond
When US stocks fall -7% or more on the S&P 500 in a single day, a circuit breaker triggers. It's easy to panic when trading suddenly stops, but knowing the trigger conditions and procedure in advance lets you respond calmly instead.
What Is a Circuit Breaker?
A Circuit Breaker is a safeguard that temporarily halts trading when the stock market drops to an extreme degree in a short period, to stop panic selling from cascading. It was introduced in the US after the 1987 Black Monday crash, and the current standard dates to a 2013 revision.
The US Circuit Breaker's 3 Tiers
| Level | S&P 500 Decline Threshold | Action Taken | When It Applies |
|---|---|---|---|
| Level 1 | -7% | Halt trading 15 minutes, then resume | Only applies if triggered before 15:25 ET |
| Level 2 | -13% | Halt trading 15 minutes, then resume | Only applies if triggered before 15:25 ET |
| Level 3 | -20% | End the entire session for the day | Applies regardless of when it triggers |
Level 3 has never been triggered in history. The most recent time Level 1 actually triggered was in early March 2020, during the COVID pandemic, when it fired 4 times in a row within just 2 weeks. At the time, the VIX fear index spiked as high as 85.
What Is a Sidecar?
A sidecar is a weaker, earlier-stage measure than a circuit breaker. It triggers when the S&P 500 futures price moves ±5% or more and holds for 1 minute or longer. Once triggered, it blocks program trading (large algorithmic orders) for 5 minutes, but individual investors' orders keep executing. It can only trigger 1x per day, and it doesn't trigger after 15:30 ET.
Sidecar vs. Circuit Breaker
| Item | Sidecar | Circuit Breaker |
|---|---|---|
| Target | Futures program trading | The entire cash market |
| Trigger threshold | Futures ±5%, holds 1 minute | S&P 500 -7%/-13%/-20% |
| Halt duration | 5 minutes | 15 minutes, or the rest of the day |
| Individual orders | Keep executing | All trading halts |
| Times per day | 1 | 1 per level |
South Korea's Circuit Breaker and Sidecar
The Korean stock market (KOSPI, KOSDAQ) has its own separate circuit breaker, with different thresholds from the US.
- Sidecar: when KOSPI 200 futures move ±5% or more from the prior close and hold for 1 minute, program trading is blocked for 5 minutes
- Circuit breaker, level 1: when KOSPI or KOSDAQ falls -8% or more from the prior close and holds for 1 minute → a 20-minute trading halt
- Circuit breaker, level 2: -15% or more, plus a further 1% decline from level 1 → another 20-minute halt
- Circuit breaker, level 3: -20% or more, plus a further 1% decline from level 2 → the session ends for the day
If you're a Korean retail investor trading US stocks, in a scenario where both the Korean and US markets drop sharply at the same time, you also need to factor in currency moves. See how exchange rates affect US stock returns.
A Checklist for a Sharp-Decline Session
- Re-check your stop-loss level: if you already set a stop-loss line, decide whether to execute it without emotion
- Check leveraged-position risk: a leveraged ETF falls 2–3x as much — check it immediately
- Check the VIX: a VIX of 40 or above can be read as a contrarian buy signal, but leave room for further downside too
- Hold your order during the halt: volatility is very high right after trading resumes, so confirm direction before acting
- Check your news sources: get your read on the situation from official sources like Reuters, Bloomberg, and CNBC, not social-media rumors
In a sharp decline, stocks move far more than usual. But in a stretch where everything is moving a lot, almost any signal ends up touching its target often, creating the illusion that the signal is good. This is why you can't compare performance without controlling for volatility — see the volatility illusion: not a good signal, just a stock that whipsaws.