Price Range Limit Mechanism for Market Stability
The Circuit Breaker is a protective mechanism used in the bond market to prevent excessive price movements and maintain stability. This user guide will explain what the Circuit Breaker is and why it is important for bond market participants.
The Circuit Breaker in Bond Market is an automatic mechanism that temporarily suspends trading if there is a sudden and significant price movement. The Circuit Breaker is triggered when the price of bonds rises or falls beyond a certain pre-determined limit. The purpose of the Circuit Breaker is to prevent market participants from trading under extreme market conditions and to protect investors from significant losses due to sudden price fluctuations.
The Circuit Breaker is important for several reasons. First, it helps prevent panic selling or buying during periods of extreme volatility, which can cause prices to move rapidly and unpredictably. This can lead to significant losses for investors who are not able to react quickly enough. Second, it provides market participants with time to assess the situation and make informed decisions about their trades. This helps to prevent knee-jerk reactions that can lead to further market disruption. Finally, the Circuit Breaker promotes overall market stability by reducing the likelihood of extreme price movements and volatility.
By setting the value threshold of the Circuit Breaker to dynamically change based on interest rates or loan duration, you can effectively mitigate the impact of a Flash loan attack. Restricting the price movement within a single block ensures that any potential damage is contained and doesn't escalate rapidly.
At our trading platform, we have implemented a circuit breaker mechanism that effectively sets price limitations for market movements within a single block. This mechanism applies to both our 'market order' and 'limit order' functions, ensuring that all orders adhere to a well-defined 3-threshold system. By doing so, we guarantee that orders remain within acceptable price ranges, effectively preventing extreme volatility and maintaining stability in our Zero Coupon bond market. The circuit breaker serves as a crucial tool to promote a secure and reliable trading environment, safeguarding both traders and the overall integrity of our platform. For a more detailed calculation, please consult the 'Formulaic for Circuit Breaker'.
How to calculate the Circuit Breaker Price Limit
Our trading platform incorporates a circuit breaker mechanism to regulate price fluctuations within a single block. This feature is applicable to both 'market orders' and 'limit orders,' and operates to ensure that orders are executed within acceptable price ranges. The primary objective of the circuit breaker is to mitigate extreme volatility and maintain equilibrium in our Zero Coupon bond market.
Limitation on Downward Price Movement:
The platform restricts the downward price movement to 5% from the Moving Average of the most recent 5 Reliable Block Prices.
Limitation on Upward Price Movement:
Conversely, upward price movement is capped at 10% from the Moving Average of the last 3 Reliable Block Prices.
Minimum Price Fluctuation:
The market is permitted to move a minimum of 2.00 for downside and 7.00 for topside.
Consider a situation where the last 5 reliable Block Prices are 80.60, 80.40, 80.30, 80.10, and the most recent is 79.60.
Downward Price Limit:
Moving Average of the most recent 5 reliable block prices is
Since movement is limited to 5% to downside, the lowest bound will be
No orders lower than 76.19 will be executed during the next block.
Upward Price Limit:
Moving Average of the most recent 3 reliable block prices is
As topside can move up to 10%, the upper limit will be
Exceptional Case: Minimum Movement:
For instance, if the last 5 reliable block prices were 20.00, 18.00, 16.00, 14.00, and 12.00, the Moving Average would be 16.00. Normally, the downward movement would be limited to 15.20 which is 95% of the 16.00. However, the platform allows for a minimum market movement of 1.00, setting the lower limit at 14.00 (= 16.00 - 2.00).