 "Trump’s tariffs trigger circuit breakers in Asian markets: What it means")
On April 2, when US President Donald Trump unleashed his harsh “reciprocal” tariffs for trading partners across the world, University of Kansas labour economist Dr Donna Ginther said, “There is nowhere to hide with respect to these tariffs. It’s going to touch the entire economy and that’s why the markets are reacting so strongly.”
And it seems that Dr Ginther was correct.
On Monday (April 7), financial markets were hit hard with stocks in Japan plunging over eight percent, while South Korea tumbled about five per cent. In Australia, stocks fell more than six per cent and in India , they fell about five per cent. Such was the situation during trading that in Japan and Taiwan, the exchange operators had to briefly implement circuit breakers to pause panic selling.
But if you are confused about what is a circuit breaker and how far stocks need to fall to trigger one, read on to find out.
How markets fared in Asia on Monday?
Asian stock markets took a big tumble on Monday following US Donald Trump’s sweeping tariffs, which he has termed as “medicine’.
Japan’s benchmark Nikkei fell by more than eight shortly after opening, while the broader Topix index last traded more than 6.5 per cent lower after recovering from its steepest losses. This triggered a circuit breaker, pausing trade for 10 minutes. As per a Wall Street Journal report, the circuit breaker kicked in at 8.45 am Tokyo Time and ended 10 minutes later, without affecting the spot trading-direct buying and selling of shares on the Tokyo Stock Exchange.
Similarly, South Korea’s Kospi tumbled more than 4.8 per cent shortly after opening. Trading was halted for five minutes when a circuit breaker designed to prevent panic selling was triggered.
Taiwanese stock operators also pulled a circuit breaker after experiencing a steep decline of nearly 10 per cent on Monday. The head of Taiwan’s stock exchange indicated that further stabilisation measures would be implemented if needed to counter the market volatility.
What are circuit breakers in trading?
Just as homes have circuit breakers, so does the trading world. When things get overloaded, it kicks in and shuts down the circuit.
In trading, circuit breakers are emergency measures established by stock markets that shut down trading activity temporarily or for the rest of the trading day when market prices drop significantly. They are commonly used for individual securities as well as broad market indexes like the S&P 500. Circuit breakers function automatically by stopping trading when prices hit predefined levels in exchanges around the world.
The main goal of a circuit breaker is to keep the market stable and avoid panic buying or selling that could cause crashes. When a stock index drops by a set percentage, trading can be paused for a specific time, allowing the market to settle and preventing more severe price changes.
As former New York Stock Exchange president Stacey Cunningham told CNBC that circuit breakers are “designed to slow trading down for a few minutes, to give investors the ability to understand what’s happening in the market, consume the information and make decisions based on market conditions”.
“It’s really a precautionary measure that we put in place so that the market can slow down for a minute,” she said.
The development of such circuit breakers came after the Black Monday event, which occurred on October 19, 1987. The Dow Jones Industrial Average dropped about 22.6 per cent, which remains the largest one-day stock market crash in history.
“There was this idea that if you stopped trading and gave a pause, then people would calm down and it might stabilise the markets,” Mason Gerety, professor emeritus at Northern Arizona University and a former research economist at the Securities and Exchange Commission, told NPR.
It was further improved after the flash crash on May 6, 2010. In the US, a circuit breaker was called in by operators in March 2020, during the onset of the Covid-19 pandemic. Circuit breakers were triggered on four separate trading days: March 9, 12, 16 and 18.
When are circuit breakers called in?
Different stock market operators have different levels as to when circuit breakers are implemented. In India, the Securities and Exchange Board of India (SEBI) has set clear rules for circuit breakers to protect investors and ensure market fairness.
In India, the circuit breaker system has three levels:
Level 1: A 10 per cent change in either direction from the previous day’s closing price leading to a 45-minute market pause. Trading resumes with a new price range.
Level 2: A 15 per cent change in either direction results in a one-hour break. After this, trading continues with a new price range.
Level 3: A 20 per cent change stops trading for the rest of the day.
In the US, circuit breakers have become a feature of the stock market that halt trading across exchanges when the S&P 500 falls rapidly. They are implemented based on different levels:
Level 1 is when the index falls by seven percent. This prompts a 15-minute halt. Level 2 is when the index falls by 13 per cent and this results in a 15-minute pause.
Level 3 is when the S&P 500 plunges 20 per cent. At this point, the exchange suspends trading for the remainder of the day.
Do circuit breakers really work?
Stock operators note that by temporarily halting trading, circuit breakers allow investors time to absorb market news and make calm, informed decisions, reducing emotional or panic-driven trades.
However, not everyone agrees with this. Many experts note that circuit breakers can cause market fragmentation — wherein trading in some stocks stops while others keep going. This can hurt overall market liquidity and efficiency.
Moreover, they can disrupt natural price movements, creating artificial volatility. This can lead to market inefficiencies, as orders tend to pile up at circuit limits. It could also lead to a false sense of security for investors, leading to complacency and worsening market issues when these breakers are activated.
With inputs from agencies
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