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The Circuit Breaker is a crucial tool for investors as it offers protection during times of market instability, fear, or crises. BMFBovespa employs this tool to safeguard investors when its primary index experiences a significant decrease.
If you are an investor, it is important to understand the concept of Circuit Breaker, which is a protection mechanism for investors on B3. Explore how this system operates in an article designed to help you.
What does Circuit Breaker mean in Bovespa?
The Circuit Breaker is a mechanism employed by the Government during periods of significant economic volatility to manage adverse movements in the financial market.
During times of crises such as the Covid pandemic or the oil crisis, it is common to observe significant fluctuations in the Bovespa index.
B3 activates a protection mechanism against significant drops in the stock exchange index by triggering the Circuit Breaker when there is a high volume of sales leading to sharp declines in asset prices.
Circuit breakers are typically used for stocks and indices. After a circuit breaker is triggered, various measures can be implemented, such as setting limits on market transactions to give investors time to assess opportunities and devise new strategies.
When was the Circuit Breaker introduced?
Circuit breakers were implemented following the stock market crash of October 1987 known as Black Monday, during which the Dow Jones Industrial Average plummeted nearly 23% in one day, marking a historical low.
Circuit breakers are designed to prevent panic selling by giving market participants a chance to pause and regroup before resuming negotiations, similar to a timeout in sports. However, this does not guarantee that prices will not fall when trading resumes.
When the Ibovespa, the main index of the Brazilian Stock Exchange B3, drops over 10% from the previous day’s close, the mechanism is activated. Learn more about this in the next section.
Discover the importance of B3 when Ibovespa decreases by 10%.
According to the operational procedures manual of the bovespa segment, three rules must be adhered to.
If Ibovespa falls by 10% compared to the previous day’s closing, trading will halt for 30 minutes.
If the Ibovespa falls by 15% upon reopening, trading will be suspended for one hour.
If the Ibovespa experiences a 20% decrease in the first two hours of trading, B3 will halt activities and set a new time for the market to reopen. This decision will be communicated to the public.
During the final 30 minutes of the trading session, the specified regulations will not apply. Should trading be halted in the second to last half-hour, upon resumption, the session may be extended for up to 30 minutes to ensure a total final trading period of 30 minutes without further interruptions.
This is a brief description of the decrease in Ibovespa and the period of inactivity.
- Shutdown time decreased by 10% compared to the day before, with a duration of 30 minutes.
- A 15% reduction compared to the previous day: one hour of downtime.
- Stopped indefinitely, with a decrease of 20% compared to the previous day.
How the Circuit Breaker operates in B3: comprehend
The mechanism was activated on the fourth occasion in March 2020 on the Brazilian stock exchange due to the anticipation of negative outcomes. It was first introduced in Brazil in 1997 and has been activated a total of 18 times in the stock exchange’s history.
The B3 internships department called for a halt in negotiations at 10:21, causing the Ibovespa to drop by 11.65% to 75,247.25, triggering a 30-minute circuit breaker.
The Circuit Breaker was implemented in the hopes of easing the situation, but after a brief improvement, the index declined once more and did not recover until another intervention was necessary.
Negotiations were halted at 11:13, with a suspension rate of 15.43% at 72.027 points, lasting for an hour due to panic over the coronavirus pandemic.
Before the COVID-19 pandemic, the B3 alarm had not sounded since May 18, 2017, which is also referred to as “Joesley Day.” This was due to the release of damaging conversations between entrepreneur Joesley Batista and then president Michel Temer, leading to an 11% drop in the Ibovespa.
The Central Bank’s decision to switch from the Cambial Bands regime to the Floating Exchange regime was another significant event during the circuit breaker.
Investors often react to declining stock values by selling their assets, triggering a chain reaction. The circuit breaker halts all automatic sell orders, also referred to as stop loss.
Interruptions in negotiations are intended to provide investors with a break during challenging times, and if an investor wants to reverse their positions, they must resubmit the assets for sale.
Conclusion
Investments in regular stocks are mostly affected by the circuit breaker as they directly involve participating in a company’s economic outcomes, influencing earnings and variable income.
No other forms of investment can be affected like this, as the circuit breaker changes based on the current situation and Bovespa’s actions. It’s important to assess the economic situation carefully to anticipate any disruptions to your investments.
In a circuit breaker, investors need to assess the effect of losses on their assets by evaluating short, medium, and long-term impacts, as well as comparing the real market value of their portfolio companies with the value traded during a significant loss day.
You must pay closer attention and be more patient with the potential losses and fluctuations in the financial market.
It is crucial to stay alert and be ready for any potential disruptions.
Investing with a long-term perspective rather than just reacting to current crises makes it easier to create strategies to increase the value of your assets.
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