How Is the “Volatility Index” Used to Set the Thresholds for Circuit Breakers?
A volatility index (like the VIX in TradFi, or a crypto equivalent) measures the market's expectation of future price volatility. Exchanges can use this measure to dynamically set circuit breaker thresholds.
In periods of high implied volatility, the allowable price movement band is widened, and in low-volatility periods, it is narrowed. This ensures the circuit breaker is relevant to current market conditions, preventing unnecessary halts.
Glossar
Circuit Breaker
Mechanism ⎊ Within cryptocurrency derivatives and options trading, a circuit breaker functions as a pre-programmed risk mitigation protocol, designed to temporarily halt trading activity when specified price thresholds are breached.
Cryptocurrency Volatility
Hazard ⎊ The inherent characteristic of cryptocurrency markets is elevated price fluctuation, which manifests as high realized volatility across trading periods.
Volatility Index
Measurement ⎊ The Volatility Index, within cryptocurrency derivatives, functions as a forward-looking gauge of market expectations for near-term price fluctuations, derived from options pricing.
Allowable Price Movement
Constraint ⎊ Allowable Price Movement, within cryptocurrency derivatives, represents the predefined boundaries governing price fluctuations for a given contract, dictated by exchange rules and risk management protocols.
Thresholds
Barrier ⎊ A threshold, within the context of cryptocurrency derivatives and options, represents a pre-defined price level that must be breached for a contract to trigger a specific outcome.