Translated by Clara Araujo da Costa
Like in other sectors, the financial market has its ups and downs. In fact, that is exactly what investors seek to obtain profit in the stock exchange: volatility.
However, when certain news or an event causes intense and abrupt movement, sales operations made amidst panic can cause damage to the market as a whole. We mention specifically sales operations because this mechanism is triggered only on BOVESPA assets when the IBOV index reaches the determined negative variations.
In order to protect those involved in ongoing operations, the Brazilian stock exchange has adopted a mechanism that has been used by the NYSE (New York Stock Exchange) since 1987’s Black Monday, when the Dow Jones index dropped 22.61%.
A Circuit Breaker is an automatic switch designed to protect a determined electrical installation against potential damage caused by short circuits and electrical overloads. In the same way, a Circuit Breaker in the stock market is triggered in situations of widespread panic to protect the market from excessive volatility, automatically interrupting tradings at the counter.
How to identify the occurrence of a Circuit Breaker?
The price of IBOV will be frozen on the first occasion that this index presents a negative variation of 10, 15 and 20%.
At this moment, Bovespa assets will be marked in yellow on the Quote Grid, indicating that they are frozen.
Negotiations do not happen during a Circuit Breaker, both times & sales and chart of these assets will be stagnant. A time chart will have candles without variation in the form of a horizontal line (-) for the duration of the Circuit Breaker.
Conditions for triggering a Circuit Breaker on the B3 (Brazilian Stock Exchange):
▪ Ibovespa with -10% in variation: negotiations suspended (not a variation limit) for 30 minutes and subsequently resumed;
▪ Ibovespa reaching -15% in variation after the first Circuit Breaker. Negotiations suspended for another 1 hour and subsequently reopened;
▪ Ibovespa reaching -20% in variation after the second Circuit Breaker. Negotiations suspended and can only be reopened at the discretion of B3’s president.
It is important to remember that the activation of a Circuit Breaker doesn’t take place during the last 30 minutes of a negotiation session.
During a Circuit Breaker, it’s not possible to cancel offers because they are not executed immediately and there may be rejections.
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