“Circuit Breaker”: What Is It and Why Is It Important for Crypto Exchanges?
“Circuit breakers” are widely used by traditional exchanges to safeguard against panic selling, and now it is about time for crypto exchanges to adopt the same mechanism.
On March 9, trading on the New York Stock Exchange was halted for 15 minutes. This happened due to the S&P 500 Index losing over 7% in the morning trading hours. A circuit breaker is a mechanism which halts trading for a certain period of time on the basis of market triggers, such as Monday’s 7% decline, to stop traders from doing things which may lead to further market slides.
Black Monday panic led to the development of “circuit breakers”
Circuit breakers were initially approved by the United States Securities and Exchange Commission after the market crash of October 19, 1987. That day, called “Black Monday,” saw the Dow Jones Industrial Average fall by 508 points (22.6%).
The New York Stock Exchanges’s website indicates that the platform has “three circuit breaker thresholds that measure a decrease against the prior day’s closing price of the S&P 500 Index — 7% (Level 1), 13% (Level 2), and 20% (Level 3).” When Level 3 is activated, trading is suspended for the rest of the day.
Should crypto exchanges implement circuit breakers?
In Bitcoin’s history there have only been 84 double-digit single-day price drops, 23 of them taking place since 2016. If exchanges set a 10% price drop as a trigger, it would not be an awkward change for the industry because such price drops are relatively rare in the history of Bitcoin.
Some may argue that this kills the decentralized spirit which cryptocurrency is supposed to represent. In reality, most trading takes place on centralized exchanges which is, in fact, an abberation of the idea of decentralization. Thus, circuit breakers would not do any harm to the idea, as some claim.
Exchanges have already become the biggest drivers of centralization in the industry. This would also finally be a choice. Not all exchanges must choose one way or another — it would be up to the users to decide which exchanges they prefer, as well as when they prefer them.
As the crypto industry matures, it becomes more closely tied to other markets. It might be time for crypto exchanges to consider using circuit breakers to halt panic selling.
In addition to making crypto markets less volatile, circuit breakers might give crypto traders more choices.