The circle is computed around the selection’s average center; each vertex slides along its own centroid-to-vertex direction, so the selection’s existing shape and topology are preserved. Enable “Flatten to average plane” to first project the vertices onto the selection’s best-fit plane for a co-planar circle. Vertex placement respects the object’s active vertex edit constraint (None, Edge, Face, or Normal). Only works with Editable Poly objects and objects with an Edit Poly modifier.