We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

In Finance, what is a Circuit Breaker?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 5,976
Share

Circuit breakers are strategies or measures that are employed by a stock exchange when there is a need to avert a sense that something catastrophic is about to happen. Sometimes referred to as a collar, the purpose of the circuit breaker is to prevent a panic situation that results in a lot of investors dumping an extreme amount of securities because there is a feeling of an impending crash or significant depression in the market. Essentially, the circuit breaker helps to form a stopgap that keeps a stock exchange on a more even keel until a more reasonable mindset prevails among the traders.

The most common configuration for a circuit breaker is to initiate a carefully crafted series of trading halts with a sprinkling of price limits. Generally, the price limits are focused on derivative markets and equities. By creating this temporary status of slowing down, there is a better chance for the commodity exchange process to continue within healthy levels, and not run out of control.

As a strategy to correct a temporary situation within a securities market, the circuit breaker is a relatively new approach. It was only after the minor stock market crash of 1987 that the concept of a circuit breaker was developed. A series of procedures was developed and agreed upon by the main stock and commodities exchange markets around the world.

These procedures would essentially involve taking specific actions to slow down market activity when falls in prices hit certain percentage levels. Various markets have provisions to employ the circuit breaker approach when falls hit levels of ten, twenty, or thirty percent. The drop is usually based on monitoring the activity on the Dow Jones Industrial Average. When a rapid drop hits ten percent, it is likely that a circuit breaker approach will be implemented by at least some of the major markets. However, to date the strategy has only been employed once, on 27 October 1997.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/in-finance-what-is-a-circuit-breaker.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.