How Do Exchanges Use ‘Circuit Breakers’ to Manage Leverage-Induced Volatility?

Exchanges use 'circuit breakers' as a risk management tool to manage leverage-induced volatility. A circuit breaker is an automated mechanism that temporarily halts trading or limits price movement when volatility exceeds a pre-defined threshold.

This pause provides a cooling-off period, preventing panic selling or buying that could lead to cascading liquidations on highly leveraged positions. By temporarily stopping the market, the circuit breaker allows traders to reassess their positions and inject collateral, mitigating systemic risk.