However, we do see that in cases of certain shares, the up and down movement of prices is severe, triggered primarily because of fear or greed of manipulators and speculators. As this kind of drastic fluctuations can harm the stock markets, a mechanism known as ‘circuit breakers’, akin to the electric circuit breakers at our home, was introduced into the system, in an attempt to put a brake on these kinds of huge fluctuations in price. This safety measure was first introduced in trading on BSE in the year 1992. This safety measure ensures the stability of the stock market and helps to protect investors. It is also called price bands or circuit limits.

How does a circuit breaker work?

When the price of a stock crosses the limit decided by the stock exchange, trading activity in that particular stock is halted for a certain time. The stock exchange fixes the limit as a percentage of the price of the stock price. The Securities Exchange Board decides the rules for breaking the circuit.

If the circuit limit for a particular stock is decided by the regulators as 15%, if in case the price of the stock in a day moves up or down 15%, then trading of that particular stock will be halted for the remaining part of the day.

CIRCUIT LIMITS FOR SENSEX AND NIFTY

The indices have three circuit limits – 10%, 15%, and 20%. The Circuit breaker is applied to Nifty or Sensex whichever is the first one to be breached. The circuit trigger limits will also depend on at what time the breach occurs.

10% fluctuation in either direction

If the fluctuation is before 1 PM – halt one hour

If the fluctuation is after 1 PM and before 2:30 PM – halt half an hour.

If the fluctuation is after 2.30 PM – no halt

15% fluctuation in either direction

After the halts mentioned above, trading resumes. In case the market once again hits 10%, there will not be a halt, but if it touches 15%, then circuit limits once again come to play.

If the fluctuation is before 1 PM – halt two hours

If the fluctuation is after 1 PM and before 2 pm- halt 1 hour

If the fluctuation is after 2 PM – there is no halt.

20% fluctuation in either direction

If after the resumption of trade, the market hits 20%, then trading will be halted for the remaining trading session.

The percentage mentioned above is calculated based on the closing values of Nifty or Sensex on the last day of the previous quarter. For example, To decide the circuit limit for the Jan-march 2020 period, the closing value of the indices on December 31, 2019, is used.

The fate of orders placed during circuit limits.

In case the market hits upper or lower circuits and trading is halted we will have wait till the market re-opens to place orders.

If there are pending orders at the time of the circuit breaker, these orders can be modified or canceled only after the trading resumes.

Individual stock circuit breaker limits.

Circuit breakers specific to a particular stock is applied both in BSE and NSE. The circuit breaker limits are 2%, 5%, 10%, and 20%. Many stocks do not fall in the circuit limit category and there are also stocks where they are not applicable.