When the stock market works in the UK, most investors will be familiar with the concept of a circuit breaker. A circuit breaker is a mechanism designed to stop trading on the market when it experiences large shifts in price that could potentially lead to further price drops or volatility in the future. This helps to protect investors from unexpected losses that could occur in less regulated markets.
The UK has two main independent regulatory bodies responsible for circuit breaker action. The Financial Conduct Authority is responsible for setting the circuit breakers at companies listed on the London Stock Exchange, while the London Stock Exchange itself is responsible for setting the circuit breakers at companies listed on its own AIM and NEX exchanges.
Circuit breakers are usually triggered when a stock's price moves above or below a predetermined level in a given day. For example, if the London Stock Exchange sets the circuit breaker limit at 10% for a given stock, then any price movement over 10% during a single trading session will trigger the circuit breaker and stop all trading for the day.
When a circuit breaker is triggered, the affected stock will be placed into a suspended status until the end of the trading day. During this time, no trades can take place in the suspended stock, giving the market a chance to cool down and allowing traders and investors to review the situation before making any decisions.
Market regulators may also attempt to intervene when a circuit breaker is triggered. This could involve stability measures such as an increase in liquidity or an intervention from the central bank. In extreme cases, the Financial Conduct Authority may suspend trading in the stock for a period of time to allow further assessment of the situation.
Circuit breakers are an important part of controlling market volatility and protecting investors from unexpected losses. By ensuring that trading stops when a stock hits a certain price level, the circuit breaker helps to reduce panic selling and other forms of manipulation. It also gives market participants the chance to assess the market situation before making any rash decisions.
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