How Do “Circuit Breakers” Function to Limit Extreme Volatility and Slippage?

Circuit breakers are automated rules that trigger a temporary halt in trading when the price of an asset moves outside a predefined band or percentage threshold within a short time. By halting trading, the mechanism stops the cascading effect of market orders consuming thin liquidity, preventing extreme, volatility-induced slippage.

The pause allows market participants to reassess the situation and re-enter limit orders, restoring order book depth.