In response to market volatility linked to Trump’s trade tariffs, Japan and Taiwan have issued circuit breakers to help prevent mass sell-offs. While this move is gaining attention, the concept itself is not new.  

Circuit breakers and trading halts have long been part of global stock markets, serving as an important tool to curb panic-driven sell-offs and provide time for investors to reassess market conditions. 

Understanding how these mechanisms work and their potential impact the markets can help investors and traders navigate volatility more effectively. 

Key Points 

• Circuit breakers are designed to help stabilise markets by temporarily pausing trading during periods of extreme volatility. Triggered by sharp price swings within a short period, they give investors and traders time to reassess and prevent panic-driven selloffs. 

• Japan and Taiwan recently activated circuit breakers after steep declines linked to US tariff tensions. These mechanisms were introduced with an aim to  curb disorderly market moves and limit likelihood of further losses. 

• Since 1987, circuit breakers have been a part of modern market infrastructure, deployed during periods of elevated market movements such as the 2016 China volatility and the 2020 COVID-19-related selloff. 

What Are Circuit Breakers? 

Circuit breakers are built-in market mechanisms that temporarily halt trading when prices move too sharply in a short period. Designed to reduce the impact of disorderly market activity, circuit breakers are triggered once an index or security hits predefined thresholds. 

Used across global exchanges, these market mechanisms aim to help restore order during extreme volatility, giving market participants time to reassess before trading resumes. 

Types of Circuit Breakers 

There are generally two main types of circuit breakers: 

1. Market-Wide Circuit Breakers (MWCBs)  

These apply to major stock indices such as the Nikkei 225, S&P 500, or Hang Seng, and are triggered when the index declines by a certain percentage within a trading session. In the US, market-wide circuit breakers operate at three levels ^[1]: 

Level	Trigger	Action
Level 1	7% drop	Trading halts for 15 minutes
Level 2	13% drop	Trading halts for 15 minutes
Level 3	20% drop	Trading halts for remainder of the trading day

2. Single-Stock Halts 

These events occur when an individual stock moves beyond a specific percentage within a short timeframe. Some exchanges also implement limit-up/limit-down rules, which place temporary caps on how far prices can rise or fall— especially in futures and commodities markets. 

For example, in March 2020, trading in Tesla Inc. (TSLA) was temporarily halted after the stock dipped over 10% within a single day, triggering a single-stock circuit breaker ^[2].  

Tariff Shocks and Trading Halts: The Impact on Asian Markets ^[3] 

On 7 April, Asian stock markets declined sharply as concerns over US President Donald Trump’s reciprocal tariffs renewed, contributed to increased market volatility and cautious investor sentiment. 

A circuit breaker is triggered in Japan, which halted trading on Nikkei 225 futures for 10 minutes after prices fell more than 8%. While this measure didn’t directly affect stock trading on the Tokyo Stock Exchange, it was designed to help slow the initial wave of volatility. The Nikkei 225 eventually recovered from a near 9% drop to trade 6.5% lower. 

Taiwan’s stock market faced similar pressure, with the Taiex index falling 9.8% at the open—its steepest decline in over a year. The sharp selloff came after a long weekend, during which global markets had already lost trillions in value. In response, exchange operators activated circuit breakers aiming to stabilise trading. 

In addition, Taiwan imposed temporary short-selling limits, which are expected to remain in place until Friday. 

Circuit Breakers Over the Years 

Here are some key historical events that have triggered circuit breakers: 

Black Monday 1987: Circuit Breaker Origin ^[4] 

On 19 October 1987, US stock markets experienced their largest single-day percentage drop in history.  

The Dow Jones Industrial Average dropped 22.6% in one session, exposing structural weaknesses in market infrastructure and shifts in investor behaviour.  

Now known as “Black Monday,” the stock market crash had no single cause. Analysts have since linked it to a mix of program trading, valuation concerns, and heightened market panic. In response, regulators introduced the first circuit breaker as part of broader reforms to enhance market stability. 

China 2016: Policy-Driven Volatility ^[5] 

China introduced its circuit breaker system at the start of 2016, aiming to control extreme market swings.  

However, the rollout faced challenges.  

That’s because the new mechanism halted trading on 4 & 7 January after the CSI 300 index dropped 7% each day. Instead of calming markets, the repeated halts were seen by many investors as contributing to additional volatility, as some investors rushed to exit before another stoppage.  

Just four days after its launch, Chinese regulators scrapped the circuit breaker system, citing unintended consequences and mounting concerns.  

March 2020: COVID-19 Market Movement ^[6] 

During the early stages of the COVID-19 pandemic, global markets faced unprecedented uncertainty and volatility. In the US, the S&P 500 triggered market-wide circuit breakers four times in March alone—on 9, 12, 16, and 18 March.  

Each time, the index fell by 7% shortly after opening, prompting an automatic 15-minute trading halt aiming to curb panic-driven selling, as a result of worsening health data, lockdown announcements, and concerns over economic disruption.  

While these pauses didn’t prevent broader market declines, they were intended to give investors a chance to process new information and adjust strategies during a highly volatile period. 

Conclusion  

Circuit breakers and trading halts function are designed as safeguards in stabilising fast-moving financial markets during heightened volatility.  

As seen in Japan’s and Taiwan’s recent responses to tariff-induced volatility, these mechanisms aren’t designed to prevent losses—but rather they create critical pauses for markets to absorb information and reassess conditions.  

While their effectiveness depends on timing, structure, and execution, circuit breakers remain a proven tool for reducing systemic risk, helping to support orderly market functioning during periods of extreme market stress. 

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