- An automatic switch that stops the flow of electric current in a suddenly overloaded or otherwise abnormally stressed electric circuit.
- An automatic halt or suspension in the trading on a stock exchange that takes effect in response to a specified amount of loss.
circuit breaker - Computer Definition
A protective device that opens a circuit upon sensing a current overload. Unlike a fuse, it can be reset.
circuit breaker - Investment & Finance Definition
A circuit breaker in a stock or futures exchange works in the same way as the circuit breakers in a home; both cut off electricity before the system becomes dangerously overloaded. Circuit breakers are designed to stop the market from going into a free-fall and are intended to restore stability by helping rebalance the number of sell and buy orders. Separate circuit breakers are triggered when the Dow Jones Industrial Average (DJIA) drops 10 percent, 20 percent, and 30 percent; the point value of each of these thresholds is calculated at the beginning of each quarter by the New York Stock Exchange. The amount of time that trading is halted depends upon the severity of the drop. Circuit breakers were instituted after Black Monday in October 1987, when the U.S. stock market crashed, and have been revised after various market sell-offs, including October 1989.
Each stock and futures market also sets its own individual circuit breakers. In the future market, circuit breakers are referred to as price limits, which also limit upward movements. Trading collars limit index arbitrage trades by allowing those trades to be placed only if they are the opposite of the market’s direction. For example, a buy order could be processed in a declining market. See also collar and price limits.