Circuit breakerin the stock market A device that automatically suspends trading during a sharp market downturnno see. Like an electrical circuit breaker, stop trading when the market overheats or drops sharply. It helps investors avoid emotional judgments. Introduced after the 1987 U.S. stock market crash Currently in effect at most stock exchanges worldwideno see.
A circuit breaker is triggered when the KOSPI or KOSDAQ falls by 81 TP3 T or more from the previous day's closing price and this condition persists for 1 minute or more, and trading is suspended for 20 minutes to the end of the trading session depending on the trigger level.
Why were circuit breakers created?
On October 19, 1987, the "Black Monday" event occurred, in which the New York Stock Exchange plummeted by 221 TP3T in a single day. The market fell into a panic, and investors, unable to make rational judgments, sold off their holdings as if throwing goods away. The circuit breaker system was first introduced to prevent a vicious cycle.It was done. The intention was to give investors time to catch their breath and stabilize market sentiment.
When circuit breakers proved effective during the New York stock market crash again in 1989, stock exchanges around the world began adopting this system. Korea also implemented it to stabilize the market following the 1998 foreign exchange crisis. Introduce a circuit breakerIt was done, and it is still in effect.
3-Step Condition for Activating a Circuit Breaker in the Korean Stock Market
Korea's circuit breaker system was subdivided into three stages in June 2015. It is structured so that increasingly strict restrictions are imposed depending on the magnitude of the decline; the reason for dividing it into stages in this way is... To assess the extent of the sharp decline and respond accordingly.no see.
| step | Activation conditions | Trading suspension time | Subsequent resumption method |
|---|---|---|---|
| Step 1 | Down more than 81 TP3 T from the previous day's closing price | 20-minute interruption | 10-minute single-price trading |
| Step 2 | Drop of over 151 TP 3T + 11 TP 3T additional compared to Stage 1 | 20-minute interruption | 10-minute single-price trading |
| Step 3 | Drop of over 201 TP 3T + an additional 11 TP 3T compared to Stage 2 | End of battle | Closed on the day |
Step 1This is the most basic level and operates when the price drops by 81 TP3 T. At this time, all stock trading is halted for 20 minutes, and then resumes for 10 minutes in a single-price format. This gives investors time to re-evaluate market conditions.
Step 2This represents a more severe situation and is triggered when the price drops by more than 151 TP3T and falls an additional 11 TP3T or more from the Level 1 reference point. Similar to Level 1, it resumes with a 10-minute single-price session after a 20-minute suspension, but it signals that market instability is significant.
Step 3This is the most extreme situation. It is triggered if the price plummets by more than 201 TP3T compared to the previous day's closing price and falls an additional 11 TP3T or more from the Level 2 threshold, and, All trading for the day is suspended and the market closesIt is possible. This reflects the judgment that additional trading could further worsen the market, as it is currently in a very unstable state.
How is it triggered in the futures and options market?
The circuit breaker standards for the spot market and the futures and options market are different. More sensitive standards are applied in the KOSPI 200 futures and options market.It works, but it activates if index futures fluctuate by 51 TP3T compared to the previous day's closing price or if the deviation from the theoretical price exceeds 31 TP3T. This is a much lower level than the 101 TP3T threshold in the spot market.
Stricter standards are applied because surges and crashes can be more drastic due to the leverage nature of the futures market. When a futures and options circuit breaker is triggered Trading suspended for 15 minutesIt will work.
What happens when the circuit breaker is activated?
The moment a circuit breaker is triggered, all new orders for spot stocks, as well as futures and options, are not accepted. Trading in progress is also halted. During this period, investors and market experts gain an opportunity to analyze the situation and calm their emotions.
Trading will resume via the 'single-price trading' method once the suspension period has ended. This is Transactions made all at once at a single price rangeThis is the method by which it is implemented, serving to mitigate sharp fluctuations to some extent. If Level 3 is triggered, trading for the day is completely terminated and resumes on the next trading day; this is a last resort to prevent a market collapse.
Is it rare for a circuit breaker to be triggered?
A circuit breaker on a trading day Activates a maximum of 1 timeIt will be. Also, after 40 minutes before closing (2:50 PM), the circuit breaker will not activate regardless of how much the stock price falls. This is a rule designed to avoid chaos just before the market closes and to prevent the circuit breaker from being abused.
In reality, circuit breaker activation is very rare. February 12, 2016The KOSDAQ index fell by more than 81 TP3T, marking the seventh trigger in history. At the time, the causes were geopolitical risks such as the suspension of operations at the Kaesong Industrial Complex and a domino effect of declines in global stock markets.
| Characteristics of the activation timing | explanation |
|---|---|
| rare phenomenon | It is very rare, triggering only once every few years. |
| Large-scale economic shock | It is always triggered when major economic or geopolitical issues erupt. |
| temporary effect | Trading resumes after a 20-minute interruption, but it does not resolve fundamental market problems. |
Points Investors Need to Know
Circuit breaker is It is a device that buys time, not one that completely prevents a market collapse.This means that even if trading is halted for 20 or 10 minutes, the market could continue to fall after resumption if the underlying factors causing the downturn are not resolved. In particular If it reaches Level 3, the market closes for the day, which means the market is in a state of panic.Therefore, investors need to maintain a cautious attitude.
Since losses can be greater than usual when a circuit breaker is triggered, measures such as adjusting investment proportions, setting loss limits, and monitoring news are necessary. Preventive habits are importantThis is why you must not let your guard down by relying solely on the system.
Frequently Asked Questions
What is a circuit breaker?
A circuit breaker is a device that automatically suspends trading during a sharp market downturn in the stock market. Like an electrical circuit breaker, it stops trading when the market overheats or drops rapidly, helping investors avoid emotional judgment.
What are the activation conditions for Korea's Circuit Breaker Level 3?
Stage 1 is triggered when the price falls by 81 TP3T or more compared to the previous day's closing price, Stage 2 when it falls by 151 TP3T or more, and Stage 3 when it falls by 201 TP3T or more. Stages 1 and 2 are suspended for 20 minutes and then resume as a single price for 10 minutes, while Stage 3 closes for the day.
What happens if the circuit breaker is activated?
The moment it is triggered, all new orders for spot stocks, futures, and options are not accepted, and ongoing trading is suspended; trading resumes via single-price trading after the suspension period.
Why were circuit breakers created?
It was introduced after the Black Monday incident in October 1987, when the New York stock market plummeted by 221 TP3T in a single day, in order to prevent the vicious cycle in which investors are unable to make rational judgments during market panic.