What are "circuit breakers" used for in trading?

What are "circuit breakers" used for in trading?

• A. To increase trading volumes during market hours
• B. To automatically halt trading during significant market declines
• C. To ensure trades are executed at the best prices
• D. To provide a temporary pause for traders to assess market conditions

Answer: (B)

Circuit breakers serve a crucial function in the financial markets by automatically halting trading during significant market declines. This mechanism is designed to prevent panic selling and excessive volatility by giving traders and investors a moment to reassess the situation before proceeding with further trade activity. Such pauses can help stabilize the market and allow participants to digest information that may be causing rapid price declines. By implementing circuit breakers, exchanges aim to create a more orderly market environment, ultimately fostering investor confidence and preventing a downward spiral that may lead to further instability. This is why stating that circuit breakers are used to automatically halt trading during significant market declines is accurate, as they play a protective role in maintaining market integrity.

Circuit breakers serve a crucial function in the financial markets by automatically halting trading during significant market declines. This mechanism is designed to prevent panic selling and excessive volatility by giving traders and investors a moment to reassess the situation before proceeding with further trade activity. Such pauses can help stabilize the market and allow participants to digest information that may be causing rapid price declines.

By implementing circuit breakers, exchanges aim to create a more orderly market environment, ultimately fostering investor confidence and preventing a downward spiral that may lead to further instability. This is why stating that circuit breakers are used to automatically halt trading during significant market declines is accurate, as they play a protective role in maintaining market integrity.