Every Stock Exchange (BV) has intelligent mechanisms that protect shareholders’ investments and the security of the stock market itself. Anyone who has invested for some time and is familiar with the language of financial market, you may have heard of some of these strategic tools.
However, it is not enough to know that they exist, it is essential to understand how they work and impact on your capital. To help you with this challenge, let’s explore one of the most interesting, the circuit breaker.
Circuit breaker is a security mechanism that acts against significant volatility in stock prices. In other words, it protects investors in situations of excessive sales, causing sharp drops in the prices of traded assets.
If you want to know more about the profitability of the stock market, we recommend reading this article here.
Now, to get to know the circuit breaker in depth, keep following the post. We separate all the details of its operation and its impacts on the financial market. Good reading!
After all, what is Circuit Breaker?
As we said, circuit breaker is a security mechanism used to interrupt all operations of the stock Exchange from Brazil, B3. It is triggered when the shares traded suffer atypical falls and relevant in their prices.
Thus, it is expected that there will be a balance between purchase orders and the sale of assets, easing their natural functioning and preventing a further fall, even more sudden and dangerous.
In addition, this shutdown allows shareholders to gain extra time to plan and structure new investment, in the face of a time of market stress.
In simple logic, imagine choosing the best investment alternative for your objective and, without warning, a scandal, such as the recent pandemic of the new coronavirus (COVID-19), get rid of every application you made quickly. The circuit breaker kicks in to protect the volatility created, and its temporary interruption allows you to reorganize your planning and protect your capital.
It is worth mentioning that the more you study and understand the dynamics of the market, the easier it will be to invest in the Stock Exchange and increase your chances of achieving good results. .
How does the circuit breaker work?
The circuit breaker works in a very simple way, its rules are linked to the drop percentage of the Ibovespa, the main indicator of the UK residents Stock Exchange, the Bovespa.
I.e, when the price decline reaches or exceeds a certain level, the shutdown is initiated and supported by a time pre-established. Understand your application rules below.
Circuit breaker stage I
When the Ibovespa declines by 10% over the closing value of the previous day, the first circuit breaker takes place.
When triggered, all trading on the Stock Exchange is interrupted for 30 minutes. During this period, no one can buy or sell shares on the stock exchange.
Circuit breaker stage II
After the first 30 minutes of stoppage, the Stock Exchange will once again allow negotiations and expects its operation to be rebalanced. If the Ibovespa continues to fall and reaches a 15% devaluation percentage, a second circuit breaker occurs.
In this second stoppage, the negotiations are interrupted for another hour.
Circuit breaker stage III
The third and final rule of the circuit breaker is stage III. After the second interruption, the negotiations already have a stop time of 1h30min, and a new balance is sought by BV, which reactivates its operation.
However, if still, the Ibovespa remains in decline and reaches 20%, B3 resumes trading again. This time, she must set a new deadline for reopening the Marketplace, which is indeterminate.
These three rules apply to all Stock Exchange operations, with the exception of only two applications:
- The rules are not applied in the last 30 minutes of the Bovespa trading session.
- If the circuit breaker occurs in the last 60 minutes of trading, when it reopens on the following day, the first 30 minutes should also be stopped.
What is the history of the circuit breaker at BV do Brasil?
For you to understand a little more about the circuit breaker, check out a summary of its history in the country. Work stoppages were recorded in 6 economic crises, one of them now in 2021. See below.
In October 1997, the Hong Kong Stock Exchange recorded a sharp 10.4% drop in its share price, knocking down other BV worldwide. Countries such as Thailand, Malaysia, the Philippines and South Korea were the most affected in Asia.
Bovespa felt the effects of this crisis quite expressively, needing to activate the circuit breaker three times. The stoppages took place on October 27, and November 7 and 12.
In September 1998, Russia was experiencing serious problems and facing the consequences of the giant Asian crisis of the previous year. The country even declared its inability to pay debts internal and external.
As a result, BV do Brasil recorded a loss of US $ 30 billion. The volatility was so high that 5 stoppages were necessary to try to control the market. The circuit breakers took place on August 21, 04, 10 (2 times) and September 17.
The Central Bank of Brazil, in January 1999, was forced to devalue the real. The succession of international crises in the post-Plano Real period seems to have been crucial for the moment of the speculative attack, which began in the second half of 1998.
In an attempt to control this economic oscillation, Bovespa interrupted its activities twice. O phase Circuit breaker I was triggered on January 13th and 14th.
In September 2008, BV do Brasil felt the effects of one of the biggest economic crises in history. The USA (United States of America) was experiencing internal bankruptcy, causing the world economy to collapse.
As the UK residents economy is directly linked to the North American, the effects were felt brutally. 6 shutdowns were necessary to try to correct volatility in stock prices. Circuit breakers took place on September 29, October 6 (twice), October 10, 15 and 22.
More recently, in May 2017, the UK residents market suffered the impacts of the award-winning plea by JBS owner Joesley Batista, in the case of Lava Jato. Major political figures in the country, including the then president of the republic, Michel Temer, were involved, bringing drastic consequences for actions in the Bovespa.
As a result, the circuit breaker was triggered 17 times on May 18, reacting to strong turbulence caused by the international scenario and by UK residents political decisions.
With the arrival of the new coronavirus (COVID-19), Bovespa, as well as the economy across the planet, suffered brutal consequences. Next, we will explore this stoppage in detail.
How was the last circuit breaker in Brazil?
We are barely halfway through the year and we have already matched the 2008 mark, with 6 circuit breakers. All stoppages occurred in March, on the 9th, 11th, 12th (twice), 16th and 18th.
The new coronavirus had already impacted BV in several other countries since the beginning of the year, and with its spread, Brazil was not unharmed.
To intensify the situation of instability, the economy he still felt the effects of the fall in the price of oil, due to a disagreement between the Organization of the Petroleum Exporting Countries (OPEC) and Russia, to try to cut the production of the commodity.
Saudi Arabia, one of the largest oil producers in the world, announced the reduction in the prices of raw materials to increase its production. Thereby, the oscillation was over 30%, affecting markets all over the planet, as well as Bovespa, which triggered the first strike.
Many investors were extremely concerned, since the shares of several UK residents companies would be impacted, including those of Petrobras (PETR4).
The next day, March 10, the circuit breaker was activated again. The WHO (World Health Organization) announced that the situation of the disease would be pandemic. Consequently, the market was disrupted.
Several other internal and external political issues led to the intensification of the Bovespa’s oscillation. The suspension of European travel through the USA, the overturning of the veto of UK residents President, Jair Bolsonaro, on the project that expands access to the Continuing Benefit Benefit (BPC), disclosure of data on the falling Chinese economy, cut in interest rates of the USA (from 1.25% to 0.25%), among others, are some examples.
Why is oscillation in BV a problem?
As we have seen so far, the circuit breaker is a mechanism used to protect the market from volatility, in moments of unexpected and sudden fluctuations. This does not necessarily mean that it is a problem for your investment.
As each case is different, it is difficult to say what impact this shutdown will have on your invested capital. However, in view of its profile in the financial market, it is possible to outline more concrete possibilities.
There are basically two types of profiles: the trader it’s the investor. Understand your particulars below.
Trader is a type of player that takes advantage of price fluctuations to earn money. That is, the up and down of the BV is an optimizer of results.
His vision is short-term and his profile is better able to deal with market noise. Thus, in times of great instability, such as economic crises, he knows how to get the best out of capital. Precisely for this reason, it is essential that he has a risk stop.
The market’s decline only intensified with the new coronavirus pandemic and the disagreement of oil suppliers, it had been in decline for some time. Thus, the few stops available are already committed.
As they are fundamental to limit the loss of money, the trader must discipline himself to get one at any cost.
Investor is a player who bets on shares, that is, the growth of companies and their long-term appreciation.
It deals with the game of value, seeking to find a “fair price” for marketing, buying and selling, of applications. Therefore, the investor is always concerned with his estimates.
The fluctuation in BV can mean an opportunity. This is because, with low prices, it is always better for investors to enter the market and bet on new strategies.
In case of significant losses, the investor must evaluate the entire macro scenario and make adjustments to minimize the loss.
Thus, with circuit breakers taking place on the Bovespa this year, the trader must seek a risk stop to ensure his safety and the investor must explore his financial intelligence and see this movement as an opportunity to learn, improve his moves and optimize his performance .
Will the economy go up again?
Even the economy is down and is likely to remain in decline or stagnant for some time, it will rise again, exactly as it happened in the last 5 crises.
The circuit breaker is a safety mechanism that can protect various types of investment and prevents the effects of an unexpected event from harming the very functioning of the stock market.
With this basic notion of BV outage explained in this article, it becomes easier to understand what happens to your invested capital and why it has valued or not. And in this way, you dominate a little more about the financial market and prepare yourself for even more interesting investments in the future.
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