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What is circuit breaking in Futures Markets?

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Circuit breakers are pre-defined trading halts or limits imposed by exchanges to prevent extreme market volatility and panic selling. They temporarily pause trading when prices move beyond set thresholds within a specific time frame.

Types of Circuit Breakers in Futures Trading

Price Limits – Restrict how much a futures contract can move up or down in a trading session.
Trading Halts – Temporary pauses in trading when a price limit is hit.
Market-Wide Circuit Breakers (MWCBs) – Applied to stock index futures when the overall market drops significantly.

Example of Price Limits:

• S&P 500 E-mini Futures (ES) Price Limits:
  • 5% move → Temporary halt for a few minutes.
  • 7% move → Level 1 circuit breaker, 15-minute halt.
  • 13% move → Level 2 circuit breaker, another 15-minute halt.
  • 20% move → Level 3 circuit breaker, trading stopped for the day.

Why Are Circuit Breakers Used?

Prevent Panic Selling – Stops extreme price drops from causing chaos.
Maintain Market Stability – Allows traders to reassess and reduce emotional trading.
Limit Systemic Risk – Prevents cascading margin calls and excessive leverage blowouts.

Futures Contracts with Circuit Breakers

Stock Index Futures (S&P 500, Nasdaq, Dow) – Follow equity market circuit breaker rules.
Commodity Futures (Oil, Gold, Corn, etc.) – Have price limits but don’t halt all trading.
Treasury & Currency Futures – Usually have wider price bands.

​Historical Example:

• March 2020 COVID Crash – S&P 500 futures hit limit down (-5%) multiple times, triggering trading halts.

Key Takeaways

Circuit breakers prevent extreme volatility by halting trading temporarily.
Different futures contracts have different price limits and halt rules.
They protect traders from panic-driven price crashes.

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