In order to curb violent and abnormal fluctuations in the stock market, the China Securities Regulatory Commission is actively studying the index circuit breaker mechanism and will apply it to the stock market. So, what is the function of the index circuit breaker mechanism? Financial Manager will tell you.

The main purpose of setting up the circuit breaker mechanism is to give the market a cooling-off period, allow investors to fully digest market information, prevent irrational and large fluctuations in the market or a certain product, especially to prevent the market from falling sharply or even a stock market crash. to maintain market stability.

The circuit breakers and price limits are set by the exchange, and the exchange can adjust the circuit breakers and price limits of futures contracts based on market risk conditions.

Foreign circuit breaker systems have two forms: melting and breaking and melting and continuing. Melting means that after the price hits the melting point, trading stops for a period of time; melting and continuous means that after the price touches the melting point, trading continues for a period of time, but the quotation is limited to the melting point.

The index circuit breaker mechanism has a great impact on the market. With reference to foreign markets and the views of industry insiders, its role can be divided into the following points:

1. For control Trading risk earns you time to think and time to operate. During the circuit breaker period, investors have enough time to avoid emotional trading and reduce the chance of a stampede.

Second, it provides an early warning function for market transaction risks, effectively preventing the suddenness of risks and the severity of risk occurrences. Taking domestic stock index futures as an example, before the market fluctuation reaches the 10% limit, a 6% circuit breaker point is introduced, that is, the index point of the stock index futures rises or falls by 6%, that is, the index quotation cannot be changed in the next 10 minutes of trading. Beyond the circuit breaker point, this not only provides a warning to traders of stock index futures, but also provides a warning to risk management at all levels of futures trading.

Third, it provides institutional guarantee for gradually resolving transaction risks. When extreme market conditions with abnormal fluctuations occur, the market without a circuit breaker mechanism will run rampant. Usually, it takes several months or even a year for the fluctuations to be completed in an instant. This will catch traders who are going in the wrong direction unprepared, doubling or even doubling the price. Accounts with several times the trading margin were quickly penetrated, which would increase the difficulty of settlement and cause countless disputes.

Fourth, it is helpful to eliminate the decline in liquidity in the futures market caused by obsolete prices. After abnormal fluctuations occur, a large number of buying and selling orders will cause system congestion. With the circuit breaker period, order congestion in the trading system can be eliminated.