How Does the Concept of a ‘Circuit Breaker’ Relate to Derivatives Trading?

A circuit breaker is a temporary halt in trading, triggered when the price of an asset or index moves beyond a predetermined threshold within a specific timeframe. In derivatives trading, it is used to cool down an overheated or rapidly crashing market.

This pause provides time for traders to reassess their positions and helps prevent panic selling or buying that could lead to market instability.