The S&P 500 Index (SPY  ) plummeted more than 7% shortly after market open on Monday, prompting a 'circuit breaker' to halt trading for 15 minutes at 9:34 a.m. Following the market's reopen, the S&P 500 and Nasdaq Composite Index (QQQ  ) fell more than 7% and the Dow Jones Industrial Average (DIA  ) dropped almost 2,000 points. Although all three averages rebounded from their lows after ten minutes, they continue to push towards a bear market, or trading 20% below their 52-week high.

What is a circuit breaker?

According to the New York Stock Exchange's rulebook, market-wide circuit breakers (MWCB) may halt trading temporary or close markets before the normal close of a trading session when triggered by a severe market decline measured by a single-day decrease to the S&P 500 Index. This decline against the S&P's previous close is measured at three levels: 7% (Level 1), 13% (Level 2), and 20% (Level 3). Following a Level 1 or 2 decline, trading is stopped for 15 minutes and then markets resume regular trading hours. However, if the market drop happens after 3:25 p.m., the market will not halt and will allow further trading until close. If a Level 3 is reached, all trading on the New York Stock Exchange will end for the rest of the day.

Why does the market use circuit breakers?

The U.S. Securities and Exchange Commission have implemented circuit breakers to help prevent panic-fueled selling on U.S. stock exchanges. These market-halting triggers where put in place following Black Monday, which was a major stock market crash that took place in October 1987. The measures were then updated after the flash crash that took place in May 2010, where the Dow saw a decline of over 9% in about ten minutes.

"The market circuit breakers are designed to slow trading down for a few minutes, give investors the ability to understand what's happening in the market, consume the information and make decisions based on market conditions," New York Stock Exchange President Stacey Cunningham told CNBC.

How do circuit breakers affect individual securities?

For individual securities, like stocks and ETFs, circuit breakers can be triggered regardless of whether the security's price is increasing or decreasing. This is different than their use to halt trading for market indices, who are only halted by price declines. An individual circuit breaker may be used when a stock's price is increasing too rapidly to help prevent overvaluation.