The circuit breaker mechanism (CircuitBreaker), also called the automatic trading suspension mechanism, refers to the suspension of trading measures taken by the exchange to control risks when the stock index volatility reaches the prescribed circuit breaker point. Specifically, it is a mechanism that sets a circuit breaker price before a certain contract reaches the price limit, so that the contract's buying and selling quotations can only be traded within this price range for a period of time.

1. The meaning of circuit breaker mechanism

“Circuit breaker mechanism” has two concepts, broad and narrow.

Broadly speaking, it means to control the trading risks of stocks, futures or other financial derivatives, setting range limits for the range of price fluctuations in a single day. Once the transaction price touches the upper and lower limits of the range, the transaction will be automatically suspended for a period of time ( "Immediately melting"), or just "lying flat" without exceeding the upper or lower limit ("melting without stopping").

In a narrow sense, it specifically refers to the "circuit breaker" of index futures. It is called "fuse" because the principle of this mechanism is similar to that of a circuit fuse. Once the current is abnormal, the fuse will automatically blow to prevent damage to the electrical appliance.

The function of the "circuit breaker mechanism" in financial transactions is also to avoid excessive price fluctuations of financial transaction products, give the market a certain cooling-off period, warn investors of risks, and provide relevant parties with the opportunity to take relevant measures. Risk control means and measures win time and opportunities.

2. The manifestations of the circuit breaker mechanism

The circuit breaker mechanism adopted in foreign exchanges generally has two forms, namely "melting and continuous"; the former refers to When the price reaches the circuit breaker point, trading will be suspended for a period of time. The latter means that after the price reaches the circuit breaker point, trading orders will continue to be matched within the circuit breaker price range for a period of time. The most commonly used fuse mechanism in the world is the "fuse and break" fuse mechanism.

The circuit breaker system planned to be introduced in my country's stock index futures is based on the 10% limit on the rise and fall of individual stocks in the stock market, and is established to suppress irrational and excessive fluctuations in the stock index futures market. According to the design, when the daily rise or fall of the stock index futures reaches 6%, it is the first melting point for CSI 300 Index futures trading. Within this range, "melting will continue", and it can still be traded when it reaches the "melting" point. The transaction lasts for 10 minutes, but the index quotation cannot exceed the 6% rise and fall; after 10 minutes, the fluctuation range is enlarged to 10%, which corresponds to the 10% rise and fall limit of individual stocks in the spot market.

3. Background of the introduction of the circuit breaker mechanism

The circuit breaker mechanism first originated in the United States. The Chicago Mercantile Exchange in the United States implemented day trading prices for the S&P 500 Index futures contract in 1982. There is a price limit of 3%. However, this regulation was abolished in 1983. It was not until the stock market crash in 1987 that people reconsidered the implementation of the price limit system.

On October 19, 1987, the largest crash in history occurred in the New York stock market. The Dow Jones Industrial Index plummeted 508.32 points in one day, a drop of 22.6%. Due to restrictions, many millionaires became poor overnight. This day was also called "Black Monday" by the American financial community.

On October 19, 1988, the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission approved the circuit breakers for the New York Stock Exchange and the Chicago Mercantile Exchange. According to relevant regulations in the United States, when the S&P index falls by 7% in a short period of time, all securities market transactions in the United States will be suspended for 15 minutes. [7]

In June 2015, there was a "stock market crash" in the Chinese stock market. The stock market fell from 5178 points to 2850 points in just two months, a drop of nearly 45%. In order to suppress the herding effect that investors may have, suppress the pursuit of gains and losses, and reduce the volatility of the stock market, investors will have sufficient time to spread information and feedback information, making information asymmetry and price uncertainty have been reduced to prevent drastic price fluctuations. The China Securities Regulatory Commission has begun to consider introducing a circuit breaker mechanism.