Understanding the Circuit Breaker Mechanism: The Stock Market's "Emergency Stop"

During times of rapid decline in financial markets, investors often fall into panic. At this moment, a market protection system called the circuit breaker mechanism is activated, similar to emergency brakes in cars, forcing a “stop” at critical moments. The circuit breaker, also known as the automatic trading halt mechanism, serves as a safeguard during extreme volatility.

How the Circuit Breaker Works

The operation of the circuit breaker is similar to an electrical fuse—when the current is too high, the fuse blows to cut off the circuit and protect the equipment; when market fluctuations are too intense, the circuit breaker pauses trading to protect the market. This design may seem simple, but it is a clever response to market risks.

Once market volatility reaches a pre-set threshold, the trading system automatically triggers a pause, giving market participants a brief “cooling-off” period to reconsider. This not only prevents market chaos but also avoids investors making irrational decisions driven by emotions.

Specific Conditions for Triggering the Circuit Breaker

Different markets have different rules for circuit breakers. For example, in China’s A-share market, the trigger conditions are closely linked to the涨跌幅 (price change limits) of the CSI 300 Index:

• First level trigger: When the CSI 300 Index rises or falls by 5%, trading is paused for 15 minutes
• Second level trigger: When the CSI 300 Index rises or falls by 7%, trading is paused for 1 hour
• Third level trigger: When the CSI 300 Index rises or falls by 10%, trading is halted until the end of the trading day

These trigger standards are adjusted based on actual market conditions and regulatory judgments to ensure the system remains aligned with market needs.

Three Main Protective Functions of the Circuit Breaker

Restrict Market Risks

The circuit breaker effectively curtails the spread of abnormal market fluctuations by pausing trading in a timely manner. When extreme conditions occur, this mechanism can immediately break vicious cycles, preventing risks from escalating and spreading further.

Protect Investors’ Rights

During sharp market swings, investors can easily lose rational judgment. The circuit breaker provides a valuable buffer period, allowing investors to reassess risks and adjust strategies instead of being forced to sell in panic. This is the most direct protection for ordinary investors.

Maintain Market Order

By limiting trading volume and implementing pauses, the circuit breaker prevents malicious manipulation, enhancing market fairness. It also improves transparency and stability, enabling all participants to trade in a relatively stable environment.

Summary

The circuit breaker is an essential safeguard in modern financial markets. By setting predefined trigger conditions and halting trading when necessary, it effectively balances market activity with risk control, protecting investors’ interests and maintaining overall market order and stability. This system design has been adopted by many major markets worldwide and has become a standard protective measure in modern stock exchanges.