Securities and Exchange Board of India (SEBI), the guardian of Indian financial market has minimized price rigging, manipulations and malpractices since its evolution. This has been achieved by taking several preventive measures and enforcing by-laws to security issuers, financial intermediaries and investors. Introducing circuit and circuit breakers in the stock market is one of the bye-laws of SEBI. Let’s have a look at what is a circuit breaker in the stock market.
- Stock market fear
- What is circuit?
- What is circuit breaker?
- What is upper & lower circuit breaker?
- Do all stocks have the circuit breaker?
- Why don’t all stocks have circuit breakers?
- Circuit breaker levels for different stocks?
- Do Nifty 50 and SENSEX have circuit breaker?
- circuit breaker level for Nifty 50 and SENSEX?
- Advantages of the stock market circuit breaker?
- Disadvantages of the stock market circuit breaker?
SEBI was established in 1988 as a watchdog for Indian financial market. At that time it had no powers. On April 12, 1992, Union Government of India passed SEBI act 1992 and made SEBI an autonomous body with statutory powers.
As an objective to take care of three main entities (security issuers, financial intermediaries and investors) in Indian financial market, SEBI divided its functioning into three parts viz.
- Protective functions
- Developmental functions
- Regulatory functions
The stock market as an ecosystem which gives security issuers a platform to gather funds for their business expansion. For traders/investors, this same platform offers an opportunity to earn by taking advantage of fluctuations in the market, either taking long or short positions. Various enthusiasts have studied historical data and introduced theories to predict the market trend. Some of these successful theories are collectively called as Technical Analysis which is very popular among traders.
Sudden huge fluctuation in a scrip is seen as a result of some news/announcement of that company or due to government policy change announcement in respective sector/company.
Sometimes this fluctuation is completely unpredictable. This sudden huge upward or downward trend is not proportional to any news/announcement, thus can be attributed as price rigging or market manipulation. SEBI has taken serious efforts to stop these malpractices by enforcing its bye-laws.
Stock market fear
Sudden huge fluctuations, either genuine or rigged, do pose a threat to the reliability of financial market. Victim/gainer of this situation are both security issuers and investors. In the context of security issuers, a downtrend can bring their stock value from double-triple digit to single digit, while an upward movement can raise their stocks to the sky. For traders, a sudden opposite trend can bring huge loss, while many traders can earn a fortune by taking advantage of the trend.
This specific situation is the culprit for the grey name stock market has earned. This specific situation is the reason, the financial market is seen as an untrusted source of income and forced many to stay away from stock market. This situation is the reason the stock market is seen as gambling. There are several other fears and myths regarding stock market which have evolved since the inception of stock market. FundsBase is glad that it has busted 10 most prominent fears of the stock market. If you have not started investing in stock market because of these fears do read this article. It has motivated many to start trading/investing in stock market.
SEBI has dealt wisely with this sudden huge fluctuation of a scrip/index by introducing circuit and circuit breaker. This introduction has stopped many stock market crash and revived the trust of traders/investors in Indian financial market.
SEBI wanted to introduce something which can prevent sudden huge fluctuation in stock market thus preserving the trust of security issuers and traders/investors in stock market functioning.
Circuit and circuit breaker emerged as an answer to this situation.
What is stock market circuit?
A fluctuation threshold was set, keeping previous day close as the normal of this threshold. This threshold is set in both +ve and -ve direction of previous day close. This threshold is called circuit.
what is a stock market circuit breaker
Whenever this threshold is breached in any +ve or -ve direction an algorithm detects this breach and an event called circuit breaker kicks in. This circuit breaker brings a halt in that equity trading. This halt may be for some hours or for whole day based upon the intensity of breach.
What is upper circuit breaker and lower circuit breaker?
A circuit is applied in +ve and -ve direction based on previous day close. When this circuit is breached in +ve direction means price goes high and circuit breaker kicks in, this circuit breaker is called upper circuit breaker.
When this circuit is breached in -ve direction means the price goes down and circuit breaker kicks in, this circuit breaker is called lower circuit breaker.
Do all stocks have the circuit breaker?
No. Not all stocks have the circuit breaker. Equities which have derivatives, don’t have circuit and circuit breakers.
Why don’t all stocks have circuit breakers?
Equities which are traded in high volume, means which are highly liquid don’t have circuit breakers. Stocks which have derivatives are highly liquid. They have buyers and sellers at all the prices so it is not possible to manipulate their prices too high or too low. Thus they don’t have a circuit breaker.
What is the level of circuit breaker for different stocks?
Various stocks’s circuit breaker is revised by the respective exchange viz. NSE-BSE. Thus it varies time to time. Information on individual stock’s current circuit breaker level can be received by the respective exchange. However NSE-BSE indexes’ do have a fixed circuit breaker.
Do Nifty 50 and SENSEX have circuit breaker?
Yes, Nifty 50 and SENSEX have circuit breaker enforced by SEBI.
What is the stock market circuit breaker level for Nifty 50 and SENSEX?
SEBI introduced circuit breaker for NSE-BSE indexes on June 28, 2001 through SEBI Circular No. SMDRPD/Policy/Cir-37/2001. NSE and BSE implemented this index based circuit and circuit breaker on July 02, 2001. Later on September 03, 2013 SEBI revised index based circuit breaker vide SEBI circular no. CIR/MRD/DP/ 25 /2013. This revision has been enforced based on calculations of NSE index Nifty50 and BSE index SENSEX.
As per the new index circuit breaker revision
The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached earlier.
The market re-opens, after index based market-wide circuit filter breach, with a pre-open call auction session.
Thus there are three circuit beaker levels in Nifty 50 and SENSEX viz. 10%, 15%, and 20%. Let’s have a look how these three are implemented in below table.
|Trigger limit||Trigger time||Market halt duration||Pre-open call auction session post market halt|
|10%||Before 1:00 pm.||45 Minutes||15 Minutes||At or after 1:00 pm upto 2.30 pm||15 Minutes||15 Minutes||At or after 2.30 pm||No halt||Not applicable|
|15%||Before 1 pm||1 hour 45 minutes||15 Minutes||At or after 1:00 pm before 2:00 pm||45 Minutes||15 Minutes||On or after 2:00 pm||Remainder of the day||Not applicable|
|20%||Any time during market hours||Remainder of the day||Not applicable|
Below images will give more clarity.
If the index price fluctuates more than 10% of previous day close in any direction, circuit breaker kicks in at three time frames
- if circuit breaker kicks in for 10% breach before 01:00 pm then market is halted for 45 min and before market opening a 15 min pre-opening session is there.
- if circuit breaker kicks in for 10% breach between 01:00 pm and 02:30 pm then market is halted for 15 min and before market opening a 15 min pre-opening session is there.
- if circuit breaker kicks in for 10% breach after 02:30 pm then market is not haltedand trading continues as normal
- if circuit breaker kicks in for 15% breach before 01:00 pm then market is halted for 1 hour and 45 min and before market opening a 15 min pre-opening session is there.
- if circuit breaker kicks in for 15% breach between 01:00 pm and 02:00 pm then market is halted for 45 min and before market opening a 15 min pre-opening session is there.
- if circuit breaker kicks in for 15% breach after 02:00 pm then market is not halted and trading continues as normal until market close.
- A circuit breaker gives time to the trader to re-think and let the market cool-down. A sudden high-low may just be a manipulation and not real lots of participant’s trade. The halt-time duration gives sufficient time for traders to go through the news/announcements and settle down to facts.
- Reduce huge fluctuation due to overreactions driven by panic.
- A circuit breaker prevents real-time price movements. Thus real-time price discovery is not seen due to the market-halt.
- Early traders/investors may take advantage if they get access to any forthcoming news/announcements before circuit breaker kicks in. While on the other side, traders who notice this opportunity somewhat late, don’t get that advantage due to market-halt.
If the index price fluctuates more than 15% of previous day close in any direction, circuit breaker kicks in at three time frames
If the index price fluctuates more than 20% of previous day close in any direction, a circuit breaker kicks in and market is halted with immediate effect for the rest of the day.
Does circuit breaker apply to commodity and currency market as well?
No, circuit breaker applies to only equities. Even in stock market circuit breaker is not applied to the equities which trade in derivatives. Means circuit breaker doesn’t apply to the equities which trade in futures and options.