Circuit breaker

A circuit breaker, in the context of financial markets, is an automated mechanism which halts trading in a security in response to unusual conditions, usually a large price fluctuation.

The purpose of a circuit breaker is to react fast to prevent trading while market regulators can investigate the causes of the price movement. If there is reason to think that the suspension in trading is due to market manipulation, insider trading, or other conditions that the regulator seeks to prevent, then the suspension on trading may be continued. For example, if price sensitive information has been (improperly) selectively disclosed, then the regulator may suspend trading to allow the information to be properly disseminated, and then allow trading to resume.

The suspension may also be continued simply to allow a fast market to settle.

The circuit breaker functionality is usually part of automated trading system software, allowing circuit breakers to react as soon as the price moves.

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