A circuit breaker is a specific mechanism that is used to mitigate extreme buying or selling. It is not the same as a trading halt because it serves a different purpose. In the case of a circuit breaker, an exchange stops trading a particular equity or index if it falls or rises below pre-established levels.
There are currently three levels of circuit breakers, each resulting in specific market action. A circuit breaker will stop trading an entire index (the DJIA, NASDAQ, S&P 500, etc.) if one of the following conditions is met:
Level 1 – a 7% decline from the previous closing price
Level 2 – a 13% decline from the previous closing price
Level 3 - a 20% decline from the previous closing price
If a Level 1 or Level 2 circuit breaker is triggered, the result is an immediate suspension of trading for 15 minutes. An exception occurs after 3:25 p.m. After that time, trading is allowed to continue. If a Level 3 circuit breaker is triggered, trading will be halted for the remainder of the trading day.
Circuit breakers can also kick in on individual equities. In this case the levels/conditions are as follows:
S&P 500, Russell 1000 or QQQ ETF - a 10% change in value of a security within a 5-minute time frame.
A 30% change in the value of a security with a price equal or greater to $1 per share.
A 50% change in the value of a security with a price less than $ 1 per share.