Volatility Interruption, in crypto trading systems, refers to a circuit breaker mechanism designed to temporarily halt or slow down trading in a specific digital asset or market segment when price movements exceed predefined thresholds within a short period. Its purpose is to curb excessive volatility and prevent cascading liquidations or market instability.
Mechanism
The mechanism operates by continuously monitoring price changes against established percentage limits (e.g., 10% movement in 5 minutes). When these limits are breached, the trading system automatically triggers a pause, often lasting several minutes, during which new orders are blocked, or existing orders are cancelled. This allows market participants to reassess conditions, replenish liquidity, and reduces panic selling or buying.
Methodology
The strategic methodology behind volatility interruption aims to impose a structural control on market dynamics, promoting orderly trading and protecting market integrity, especially in nascent or highly liquid crypto markets. It functions as a systemic risk mitigation tool, preventing flash crashes and manipulative practices, thus providing a layer of stability for institutional traders and investors.
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