What is a Circuit Breaker and How Does It Affect Your Investments?

Have you ever wondered how the stock market deals with situations of extreme volatility?

O market protection mechanism called Circuit Breaker was created for these moments.

But how does it affect the investment security and stock volatility?

In this article, we will explain what the Circuit Breaker is and how it works at B3.

We will also look at its impact on investments.

You will learn about the history of the Circuit Breaker on the Brazilian Stock Exchange and tips to protect your investments when it is triggered.

Main Points

• The Circuit Breaker is a market protection mechanism for moments of extreme volatility.
• In B3, there are three stages of Circuit Breaker activation with different interruption durations.
• In 2020, the Circuit Breaker was triggered six times due to the coronavirus pandemic.
• The mechanism helps to ensure the investment security by giving investors time to reevaluate their decisions.
• Understanding how the Circuit Breaker works can help protect your investments in times of crisis.

Understanding the Circuit Breaker

O definition of Circuit Breaker is essential to understand its importance. It is widely used in distributed systems and in the stock market.

This device monitors calls to external services such as APIs and databases.

If it detects excessive failures or high latency, it closes the circuit.

This prevents services from becoming overloaded, thus maintaining system stability.

When the circuit is closed, it remains that way until service recovers.

New requests are blocked during this time. This helps prevent further failures.

Additionally, the circuit can be in a state ajar.

This allows you to test the service recovery before returning to normal operation.

Using Circuit Breaker can improve call efficiency by up to 40%.

It also increases process productivity by 55%.

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Reduces overhead on calls to external services by up to 50% and reduces the impact of failures by 70%.

In the stock market, the Circuit Breaker is crucial.

If the Ibovespa falls too quickly, trading is paused.

This gives investors time to assess the market and react better.

API failures are common in microservices systems.

Therefore, the Circuit Breaker is very important. Its implementation reduces human intervention by almost 45%.

It can also avoid up to 60% of requests to recently restored services if operating in the half-open state.

In short, the Circuit Breaker works by controlling and minimizing the impact of faults.

This ensures the stability and continuity of operations.

How the Circuit Breaker Works at B3

On the Brazilian Stock Exchange, B3, the Circuit Breaker is triggered at three levels of devaluation of the Ibovespa.

This mechanism is fundamental for the financial market protection.

It prevents panic and gives you time to evaluate assets rationally.

If the Ibovespa falls 10% compared to the previous close, trading is halted for 30 minutes.

If the index falls another 5% and reaches 15%, the market will pause again, now for one hour.

In extreme cases, a drop of 20% results in an indefinite suspension.

B3 defines this time, ensuring that the last half hour of the market is maintained for trading.

These Circuit Breaker rules help to moderate panic in the markets.

They allow investors to analyze conditions without the pressure of a continued decline in stock prices.

In recent history, the system of financial market protection was triggered on several occasions.

This happened during significant crises such as in 2008, during the subprime crisis in the US, and in 2020, during the coronavirus pandemic.

In both situations, these measures were essential to stabilize the market and avoid major collapses.

History of Circuit Breakers on the Brazilian Stock Exchange

Circuit breakers are rare events that show extreme moments in the market.

In Brazil, the circuit breaker history shows major financial crises.

They also show the influence of global crises on the economy.

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Since it began, the Brazilian stock exchange has activated the circuit breaker 22 times.

In 2022, six of those interruptions were in March, due to the COVID-19 pandemic.

During the 2008 financial crisis in the US, the stock market was halted six times.

In 1999, two interruptions were due to the devaluation of the real.

These moments are critical moments of B3, showing economic volatility and uncertainty.

In 2020, the COVID-19 pandemic had a major impact. The Ibovespa fell from 114,000 points in February to 63,000 points in March.

But by the end of the year, it had returned to 120,000 points in December.

In the 1997 Asian crisis, the circuit breaker was triggered three times. This was because of the instability in the Asian market.

O circuit breaker history show critical moments of B3 influenced by financial crises global.

These events highlight the importance of the circuit breaker for market stability.

They protect investors in times of high volatility.

Impact of Circuit Breaker on Investments

O impact of Circuit Breaker in investments is great.

It changes how investors act and how the market works.

The Circuit Breaker works on three levels.

The first is triggered when the index falls 10% from the previous day's close, stopping trading for 30 minutes.

If the drop reaches 15%, the second level is triggered, stopping trading for 1 hour.

And if the decline reaches 20%, the third level may stop trading for an indefinite period.

In the 2020 pandemic, the Circuit Breaker was used several times.

This was to control the extreme volatility and keep the market stable. In March 2020, the Ibovespa suffered major drops.

This happened because of the pandemic, activating the Circuit Breaker six times in eight days.

Investors with diversified portfolios and long-term strategies are less affected.

The Circuit Breaker gives you time to think before selling. This helps you make better decisions and keeps the market stable.

In America, regulators also use Circuit Breaker.

They have three intervention levels. They are triggered when the S&P 500 index falls 7%, 13% and 20%.

These pauses help control volatility and avoid losses.

Circuit Breakers were created after major crises, such as the 1987 crash and the 2010 flash crash. They are essential for a more stable market.

Although some people criticize them, saying they can increase volatility, most believe they are important for investor confidence.

How to Protect Your Investments During a Circuit Breaker

During a Circuit Breaker, it is crucial to remain calm.

An effective strategy is to diversify your portfolio. This helps reduce risk by balancing losses and gains.

Use orders stop loss is also recommended.

They limit automatic losses when prices fall.

Investing in less volatile assets, such as fixed income securities, can bring stability.

It is essential to be well informed about the market.

For example, in March 2020, the Circuit Breaker was triggered several times at B3.

Knowing these processes avoids impulsive decisions.

Take precautions in the stock market is important.

Following an investment plan helps you protect and take advantage of opportunities.

A structured plan ensures rational decisions, avoiding emotional reactions.

Brokers and managers often warn of turbulence.

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They monitor future indices and indicators. This offers additional protection for those who follow experts.

Conclusion

Understanding what a “Circuit Breaker” is is crucial for those who invest in stocks. This article explained how it works at B3, its history in Brazil and its impact on investments.

We highlight the importance of investing safely during a circuit breaker.

It is vital to understand how it works and preventive measures.

This helps protect your assets during times of volatility.

Preparing and diversifying investments increases market resilience.

Therefore, knowing about “Circuit Breakers” and applying this information to your investment practices is essential.

This way, you will be better prepared to deal with uncertainty.

You will be able to make safer decisions, strengthening your financial position in the face of crises.