Circuit Breaker

A circuit breaker is a market mechanism that pauses trading when prices move too quickly. It is designed to reduce panic, provide time for information to be processed, and stabilize market conditions.

Types of Circuit Breakers

Market wide circuit breakers halt trading across an entire exchange when broad indices fall by preset percentages. Single stock circuit breakers halt trading in an individual security after large intraday moves. Some markets use volatility interruption auctions instead of full halts.

How They Work

When thresholds are triggered, trading is paused for a defined period. Orders may be canceled, queued, or held depending on venue rules. After the pause, trading resumes through an auction or a reopening process.

Impact on Trading

Circuit breakers can create gaps when trading resumes. Liquidity often disappears near the trigger levels, and spreads widen. Strategies that rely on continuous execution must account for the possibility of sudden halts.

Risk and Compliance Considerations

Traders should review exchange rules on order handling during halts. Risk controls should be prepared for rapid mark to market changes after reopening. Automated systems should avoid sending orders during restricted periods.

Conclusion

Circuit breakers protect markets from extreme disorder, but they can disrupt execution and risk management. Traders should plan for them as part of operational readiness.