Circuit Breakers and VI (Volatility Interruption)

When prices crash in a short time, investors can fall into panic and everyone sells, and that selling drags prices down further, creating a vicious cycle.

At such times, briefly halting the market gives investors time to catch their breath and re-examine information. Like a car's brakes, the devices that cool an overheated market are exactly the circuit breaker and VI.

These devices are not meant to manipulate the market; they are systems to protect investors from abnormal, sudden swings.

A circuit breaker is a system that halts trading of the entire market when a whole index like KOSPI or KOSDAQ falls sharply. Korea operates it in 3 stages.

Stage 1: if the index falls 8% or more from the previous day's close and stays there for 1 minute, all trading is halted for 20 minutes and then resumes with single-price trading for 10 minutes.

Stage 2: if it falls 15% or more (an additional 1% drop beyond Stage 1), likewise there's a 20-minute halt followed by a 10-minute single-price resumption.

Stage 3: if it falls 20% or more (an additional 1% drop beyond Stage 2), all stock trading for the day ends. Each stage can be triggered only once per day.

If the circuit breaker halts the whole market, VI (Volatility Interruption) briefly halts only a specific stock when that one stock spikes or plunges.

There are two kinds of VI. Static VI triggers when a stock moves ±10% or more from a reference price such as the previous day's close. Dynamic VI triggers when it jumps suddenly compared with the most recent execution price; the threshold is about ±3% for KOSPI 200 stocks and ±6% for ordinary and KOSDAQ stocks.

When VI triggers, that stock switches to single-price trading for 2 minutes. During these 2 minutes, incoming orders are gathered and executed at once, reducing momentary price distortion.

It's easy to confuse this with the similarly named "sidecar." A sidecar is a system that, when futures prices swing 5% for KOSPI (6% for KOSDAQ) or more from the previous day and stay there for 1 minute, suspends the effect of program-trading orders for just 5 minutes.

In other words, a sidecar is a light device that briefly halts "only program trading," while a circuit breaker is a powerful device that halts "trading of the whole market." They differ in trigger strength and scope.

The fact that such a device has triggered is a signal that the market is shaking that much. In fact, during the 2020 COVID crash, circuit breakers triggered in both Korea and the U.S.

What matters is understanding, rather than fearing the trading halt itself, that such sudden swings can happen anytime in long-term investing. If you look at past crashes and their recovery processes on this site's crash-cases page, you can see that how you endured the aftermath, rather than the brief pause, determined the outcome.