Amidst the turmoil caused by US President Donald Trump’s tariffs, the Asian markets, including those in Japan, South Korea, and Taiwan, experienced significant plunges, prompting circuit breakers to be activated to halt panic selling. But what exactly are these circuit breakers, and how effective are they in stabilizing trading activities?

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When President Trump announced his reciprocal tariffs on April 2, University of Kansas economist Dr. Donna Ginther predicted that the tariffs would have a widespread impact on the economy, leading to the strong reactions observed in the markets. This prediction proved true as stocks in Japan, South Korea, Australia, and India took a hit, with Japan and Taiwan resorting to circuit breakers to manage the situation.

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Following the tariff announcements, Asian stock markets faced a significant decline, with Japan’s Nikkei and South Korea’s Kospi experiencing sharp drops, triggering circuit breakers to temporarily halt trading. Taiwan also witnessed a steep decline, leading to the implementation of stabilizing measures by the stock exchange operators to counter the market volatility.

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Circuit breakers, akin to those in homes, are emergency measures implemented by stock markets to temporarily suspend trading activities when market prices experience substantial drops. These measures are designed to prevent panic buying or selling, thereby maintaining market stability and preventing severe price fluctuations.

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The concept of circuit breakers in trading emerged after historical market crashes like Black Monday in 1987 and the flash crash in 2010. These events prompted the introduction and refinement of circuit breakers to mitigate extreme market volatility and provide investors with a brief pause to make informed decisions.

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Stock market operators around the world, including in India and the US, have established specific rules for implementing circuit breakers at different levels of market fluctuations. In India, the circuit breaker system operates at three levels, while in the US, circuit breakers are triggered based on percentage declines in the S&P 500 index.

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While circuit breakers aim to provide investors with a moment of reflection during turbulent market conditions, some experts argue that these measures can lead to market fragmentation and artificial volatility. The halting of trading in certain stocks while others continue can disrupt market efficiency and liquidity, potentially creating a false sense of security for investors.

Despite the intended purpose of circuit breakers to stabilize markets, their effectiveness remains a subject of debate within the financial industry. While these measures offer a brief respite during market turmoil, they also raise concerns about market fragmentation and potential inefficiencies in price discovery.

In conclusion, as global markets navigate the impact of geopolitical events and trade policies, the role of circuit breakers in mitigating market volatility continues to be a topic of discussion among experts and industry stakeholders.