Do ‘Circuit Breakers’ Calm Markets or Panic Them?

U.S. stock trading saw a series of temporary trading halts in mid-March as frenzied reactions to the coronavirus pandemic triggered the market’s so-called circuit breakers. Such pauses in trading -- used by various countries around the world -- are seen as a tool to take the sting out of market meltdowns. They can also help address the risk of erroneous trades in an era of high-frequency trading. Though circuit breakers can curb volatility, they can also backfire, as China and the U.S. have experienced.

In the world of electronics, circuit breakers cut the flow of electricity when there’s an overwhelming surge of power. In stock markets, they do pretty much the same thing. Introduced in the U.S. after a 23% crash in the Dow Jones Industrial Average on Black Monday in 1987, the U.S. circuit breakers trigger a timeout from trading after prices tumble by a predetermined amount.