CFA Level I · CFA Level I Exam · Equity Issuance and Trading
Which of the following best describes the primary purpose of a circuit breaker used by exchanges and regulators?
A circuit breaker is best described as a mechanism that temporarily halts trading after large price declines. The pause gives investors time to assess information and curbs panic-driven selling. It does not fix prices at the prior close or permanently prohibit short selling.
- ATo halt trading temporarily after large price declinesCorrect
- BTo fix each security's price at its prior close
- CTo prohibit short selling permanently
Explanation
Circuit breakers temporarily pause trading when prices fall by a set amount, giving participants time to absorb information and reducing panic-driven moves. They do not fix prices at prior closes or permanently ban short selling.
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