Legal Definitions - curb

A trading curb, often referred to as a circuit breaker, is a regulatory mechanism implemented by financial exchanges to temporarily halt or restrict trading in securities or commodities when prices move too rapidly in a short period. The primary purpose is to prevent panic selling or buying, allow market participants to assess new information, and restore order and stability to the market. These curbs are typically triggered by predefined price thresholds or volatility levels.

• Example 1: Market-Wide Downturn

  Imagine a day when a major economic report is released, causing widespread investor concern. The stock market begins to plummet rapidly, with a key index like the Dow Jones Industrial Average dropping by 7% within minutes of the market opening. To prevent a complete meltdown and give investors time to process the news without making rash decisions, the exchange automatically triggers a market-wide trading curb, halting all trading for 15 minutes.

  This illustrates a trading curb being used as a circuit breaker for the entire market, triggered by a significant percentage drop, to stabilize the market and prevent further panic.

• Example 2: Single Stock Volatility

  Consider a situation where a technology company announces unexpected negative results for its flagship product. Within seconds of the announcement, the company's stock price drops by 20%. The exchange's rules for individual securities immediately activate a trading curb specifically for that stock, pausing its trading for five minutes.

  This demonstrates a trading curb applied to a single security experiencing extreme, rapid price movement due to sudden news, allowing a brief pause for investors to absorb the information before trading resumes.

• Example 3: Commodity Market Spike

  Suppose there's a sudden, unforeseen geopolitical event that threatens global wheat supplies. In response, the price of wheat futures contracts on a commodity exchange spikes dramatically, exceeding its daily price limit within minutes. To prevent excessive speculation and ensure an orderly market, the exchange imposes a trading curb, temporarily suspending trading in those specific wheat futures contracts.

  This example shows a trading curb being applied in a commodity market, triggered by a rapid price increase exceeding a predefined limit, to manage volatility and maintain market integrity in response to external events.