The S&P 500 fell as much as 3.8% on Thursday as chip stocks crashed. Another 3.3% drop would have flipped a switch that freezes every US stock at once.

That switch is a circuit breaker, and it locks every buyer and seller out of US stocks for 15 minutes.

What Is a Circuit Breaker, and How Close Did Stocks Get?

Circuit breakers are automatic, market-wide trading pauses. US exchanges created them after the October 1987 crash, an SEC filing shows.

The triggers reset daily from the S&P 500’s last close, 7,688.62 on Wednesday.

A 7% fall, to 7,150.41, stops trading for 15 minutes. A 13% fall, to 6,689.09, stops it again. A 20% fall, to 6,150.89, ends the day.

The first two pauses only work before 3:25 p.m. Eastern Time (ET). After that, a slide runs straight to the close.

The Nasdaq fell harder, but only the S&P 500 can trip the switch.

Nasdaq and S&P 500 Performance. Source: TradingView

Democrats won Congress on Tuesday, and investors fear slower growth for the data centers that buy AI chips, which drove Thursday’s chip selloff.

The Philadelphia Semiconductor Index, which tracks major US chipmakers, fell 10.2%.

By midday, the S&P 500 had recovered to about 7,400, leaving roughly 285 points of room, Trading Economics data showed.

Do Circuit Breakers Calm Panic or Feed It?

The switch last fired four times in March 2020, during the COVID-19 crash. Experts still disagree on what it did.

Some researchers warn of a “magnet effect,” where prices get pulled toward the trigger as they near it.

“…the circuit breakers slowed, but did not completely inhibit downward pressure and the magnet effect is in play,” wrote Laura Kodres, senior distinguished fellow at MIT Golub Center for Finance and Policy.

The exchanges disagree. A 2022 World Federation of Exchanges (WFE) study found prices steadied after the 2020 halts.

“…the circuit breakers in the U.S. are designed adequately and serve as an effective safeguarding mechanism,” WFE CEO Nandini Sukumar said in a statement.

On November 1, BeInCrypto reported Jim Cramer’s warning that the midterms could extend the Nasdaq selloff. The 7% line stays live until 3:25 p.m. ET.

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