Circuit Breakers:

• A mechanism to limit extreme price movements

• Also known as price bands or circuit limits

• Designed to stabilize the stock market and protect investors

How it works:

• Sets a maximum permissible price movement (up or down) in a stock

• When the price reaches the circuit breaker limit, trading is halted for a specified time

• Allows the market to cool down and rational thinking to prevail

Objective:

• Prevents excessive volatility and market crashes

• Maintains market stability and investor confidence

Circuit breakers play a crucial role in maintaining the integrity of the stock market, and their implementation has been adopted by various exchanges globally.

How Circuit Breakers Work

Circuit breakers are triggered when a stock's price movement exceeds a predetermined percentage limit set by the stock exchange. Here's a step-by-step explanation:

1. Limit setting: The stock exchange fixes a circuit limit as a percentage of the stock's price (e.g., 15%).

2. Price movement: If the stock's price moves up or down by the specified percentage (15% in this case) during a trading day.

3. Circuit breaker triggered: Trading is halted for the remaining part of the day.

4. Cooling period: The trading halt allows the market to cool down, reducing volatility and allowing rational thinking to prevail.

5. Trading resumes: The next trading day, the stock is again available for trading, and the circuit breaker is reset.

The Securities and Exchange Board of India (SEBI) decides the rules for circuit breakers, and the stock exchange implements them to maintain market stability and prevent excessive volatility.

Circuit limits for Sensex and Nifty are as follows 

• 10% circuit limits:

  • If triggered before 1:00 pm, trading halts for 45 minutes.

  • If triggered between 1:00 pm and 2:30 pm, trading halts for 15 minutes.

  • If triggered after 2:30 pm, no trading halt occurs.

• 15% circuit limits:

  • If triggered before 1:00 pm, trading halts for 1 hour 45 minutes.

  • If triggered between 1:00 pm and 2:00 pm, trading halts for 45 minutes.

  • If triggered after 2:00 pm, trading halts for the remainder of the day.

• 20% circuit limits:

  • If triggered at any time during trading hours, trading halts for the remainder of the day.

In all cases, a 15-minute pre-open call auction session occurs after the trading halt ends.

Order Handling during Circuit Limits

When a circuit limit is triggered and trading is halted:

• New orders cannot be placed until trading resumes.

• Pending orders at the time of the circuit breaker can only be modified or canceled after trading resumes.

Individual Stock Circuit Breaker Limits

• Both BSE and NSE apply circuit breakers to specific stocks.

• Circuit breaker limits for individual stocks are:

  • 2%

  • 5%

  • 10%

  • 20%

• Note that not all stocks are subject to circuit limits, and some may be exempt.