The fuse mechanism, also known as automatic stop mechanism, refers to the measures taken by the exchange to suspend trading to control risks when the stock index fluctuation reaches the specified fuse point. Specifically, it is a mechanism to set a fuse price for the contract before the contract reaches the price limit, so that the contract trading quotation can only be traded within this price range for a period of time.
There are two concepts of "fuse mechanism": broad sense and narrow sense. Broadly speaking, in order to control the trading risk of stocks, futures or other financial derivatives, the range limit is set for their one-day price fluctuation range. Once the transaction price touches the upper and lower limits of the range, the transaction will be automatically interrupted for a period of time, or "flat" without exceeding the upper and lower limits.
The fuse mechanism in a narrow sense refers to the "fuse" of stock index futures. It is called "fuse" because the principle of this mechanism is similar to that of circuit fuse. Once the current is abnormal, the fuse will automatically blow to avoid electrical damage. The function of "fuse mechanism" in financial transactions is also to avoid excessive price fluctuation of financial transaction products, give the market a certain cooling-off period, warn investors of risks, and win time and opportunities for relevant parties to take relevant risk control measures.