Yesterday, the Nikkei 225 and Topix both plummeted by more than 12%, and the circuit breaker mechanism was triggered multiple times during the session; Taiwan's stock market recorded its largest decline since 1967, South Korea's largest decline since 2008, and the Dow Jones Industrial Average fell more than a thousand points to match the S&P The biggest drop in two years, Fidelity and others warned of trading glitches.

Today, as expectations of a U.S. economic recession cooled, global markets rebounded. The Nikkei 225 closed up 10.23% at 34,675.46 points, and the Topix rose 9.3% at 2,434.21 points. Topix futures once triggered the circuit breaker mechanism upward during the session.

The violent fluctuations in the global financial market this time are full of words such as circuit breaker.

What is circuit breaker

The circuit breaker mechanism is a protective measure set up in the financial market. When the market experiences severe fluctuations, trading is automatically suspended for a period of time to prevent excessive market fluctuations and market panic.

The circuit breaker mechanism sets a threshold for price fluctuations. Once market price fluctuations reach or exceed this threshold, trading will be automatically suspended, giving investors a cooling-off period so that they have time to conduct calm analysis and decision-making, thereby avoiding irrational transactions. Behavior.

The significance of the circuit breaker mechanism is mainly reflected in the following aspects:

●Stabilize market sentiment: The circuit breaker mechanism automatically suspends trading when the market fluctuates violently, providing investors with a cooling-off period to prevent irrational selling caused by panic, thereby stabilizing market sentiment.

●Prevent market collapse: When the market fluctuates significantly, the circuit breaker mechanism can effectively prevent the market from rapidly collapsing. Suspending trading can prevent prices from continuing to fall or rise and prevent the market from entering a vicious cycle.

●Protect the interests of investors: The existence of the circuit breaker mechanism allows investors time to make calm analysis and decision-making in the face of violent fluctuations, thereby protecting their interests and reducing losses caused by market panic.

Circuit breaker mechanisms for different markets around the world

US stock market

●The U.S. stock circuit breaker mechanism was born in 1988, which can play a certain stabilizing role in the market and individual stock trends.

●The benchmark index for index circuit breaker is the S&P 500, which only targets market declines and is divided into three thresholds: 7%, 13%, and 20%.

●Individual stock circuit breakers include rising circuit breaker and falling circuit breaker, which can be triggered multiple times in a single day.

Exponential circuit breaker

The primary market circuit breaker caused the S&P 500 Index to fall by 7%If the primary market circuit breaker is triggered and the time occurs between 9:30 and 15:25 Eastern Time (inclusive), trading in all stocks in the market will be suspended for 15 minutes; if the circuit breaker occurs after 15:25 Eastern Time, there will be no suspension. trade. If the trading day is a half-day trading, the time cut-off point is 12:25. The market-wide trading suspension based on the primary market circuit breaker is only triggered once a day. For example, if the price falls by 7%, the primary market circuit breaker is triggered, and then the price rebounds. When it falls by 7% again, the circuit breaker will not be triggered again, unless the price drops to 13%, triggering the secondary market circuit breaker.

The secondary market circuit breaker caused the S&P 500 Index to fall by 13%If the secondary market circuit breaker is triggered and the time occurs between 9:30 and 15:25 Eastern Time (inclusive), trading in all stocks in the market will be suspended for 15 minutes; if the circuit breaker occurs after 15:25 Eastern Time, there will be no suspension. trade. If the trading day is a half-day trading, the time cut-off point is 12:25. The market-wide trading suspension based on the secondary market circuit breaker is only triggered once a day. For example, if the price falls by 13%, the secondary market circuit breaker is triggered, and then the price rebounds. When it falls by 13% again, the circuit breaker will not be triggered again, unless the price falls by 20%, triggering the tertiary market circuit breaker.

The tertiary market circuit breaker means that the S&P 500 Index fell by 20%During any trading period throughout the day, if the third-level market circuit breaker is triggered, trading in the entire market will cease until the opening of the next trading day.

Individual stock circuit breaker mechanism

According to the SEC’s investor website, on a pilot basis, the U.S. Securities and Exchange Commission began in 2012 to formally approve a mechanism called “Limit Up/Limit Down (LULD)” to regulate S&P 500 index constituent stocks. , Russell 1000 Index constituent stocks, ETP (Exchange Traded Products) stocks in the pilot list, etc., implement trading circuit breaker restrictions.

If the trading price of a certain stock rises or falls by more than 10% within 5 minutes, trading will be suspended. If the trading price of the stock does not return to the specified "price fluctuation range" within 15 seconds, trading will be suspended for 5 minutes.

For the S&P 500 Index and Russell 1000 Index constituent stocks and individual stocks in exchange-traded products with a price of more than $3, the "price fluctuation range" stipulated by the SEC is an increase or decrease of 5%. Other trading prices below $3 are more liquid. The "price fluctuation range" of weak stocks is relaxed to 10%.

If a stock triggers the price limit and the time is:

Between 9:45-15:35 (inclusive) Eastern Time, trading of individual stocks will be suspended for 5 minutes;Trading will not be suspended after 15:35 Eastern Time. If the trading day is a half-day trading, the time cut-off point is 12:35 Eastern Time.

Hong Kong stock market

The circuit breaker mechanism of Hong Kong stocks is also called the market volatility adjustment mechanism (VCM).

When the price of the stock/futures contract reaches the trigger price range, the market volatility adjustment mechanism (VCM) will be triggered and a 5-minute cooling-off period will be initiated, limiting transactions to the specified price limit. Normal trading will restart after 5 minutes. 

Market Volatility Adjustment Mechanism (VCM) Mechanism

●Securities market: The reference price changes by more than ±10%

●Derivatives market: The reference price changes by more than ±5%

●Reference price: last transaction 5 minutes ago

●Market scope: Hang Seng Index and Hang Seng China Enterprises Index component stocks and related index futures contracts.

●Applicable period: Only applicable to the continuous trading period, excluding the 15 minutes before the morning market and lunch market, and the last 15 minutes of the lunch market.

●Transaction price: During the 5-minute cooling-off period, the transaction price can only be within the trigger price limit, that is, ±10%/±5% of the reference price (according to different markets).

Korean stock market

The Kospi and Kosdaq indexes of the Korean stock market implement a three-level circuit breaker mechanism. The circuit breaker thresholds are 8%, 15% and 20% respectively. When the 8% and 15% red lines are triggered, trading will be suspended for 20 minutes; when 20% is triggered, the market will be closed directly.

Japanese stock circuit breaker rules

The Japanese market does not have a city-wide circuit breaker for stock indexes. The Japanese exchange only implements trading suspensions for related futures, options and other derivatives, and each product has its own unique set of circuit breaker rules.

Taking the Topix Index futures that triggered the circuit breaker on Monday as an example, the circuit breaker thresholds for levels one, two, and three are 8%, 12%, and 20% respectively. If the main month is traded at the upper limit (lower limit) of the increase or decrease, then futures contract trading in all months will be suspended for more than 10 minutes.

The benchmark price for increases and decreases is not simply the closing price of the previous day or the latest price 5 minutes ago, but a benchmark price uniformly stipulated by the Japan Exchange Group. The specific rules are as follows:

Japan’s circuit breaker design means that the index itself will not experience a circuit breaker. As long as the relevant stocks do not trigger the individual stock circuit breaker rules, trading will not be suspended due to fluctuations in the index. Japan's regulations on individual stock circuit breakers are very complex and detailed, making it almost impossible for a large number of stocks to circuit breakers at the same time, thus ensuring the continuity of Japanese stock market transactions.

But this design also means that the fluctuations of the index cannot be suppressed by suspending stock trading, and can only allow derivatives to reversely affect the rise and fall of the market. Under the panic, its effect may be greatly reduced, turning into a tragedy in which the index plummets in the front and derivatives transactions continue to melt down in the back. The Topix and Nikkei indices seemed to confirm this result yesterday.