Circuit breakers temper market frenzy

A pre-opening session of 15 minutes was mandated after trading resumed post the compulsory halt.

MUMBAI, MAHARASHTRA, 23/01/2015: A traffic signal in the foreground of the Bombay Stock Exchange's on Dalal Street seems to reflect the mood of the stock markets in Mumbai on January 23, 2015. The Sensex and Nifty hit a record high for the fourth consecutive session after the European Central Bank (ECB) announced larger-than-expected measures to stimulate the region’s sagging economy. Photo: Paul Noronha

What are market wide circuit breakers?

Market-wide circuit breakers refer to the daily limit — both on the upside and the downside — that the benchmark indices can move in a single day before a trading halt is initiated. The circuit breaker mechanism was introduced in July 2001 as a measure against a significantly huge swings in the Sensex or Nifty.

Most recently, the circuit breakers were triggered on Friday after the Nifty hit the first limit of 10% soon after the start of the trading session. As per regulations, trading is suspended in both the BSE as well as the National Stock Exchange (NSE), if either of the benchmarks hits the circuit breaker.

What are the circuit limits?

The limits have been pegged at three levels — 10%, 15% and 20% — and the duration of the trading halt has been linked to the time at which the triggers are hit. If any of the benchmarks move 10% before 1 p.m., then trading is halted for 45 minutes.

Such a movement between 1 p.m. and 2:30 p.m. entails a 15-minute halt, while a 10% swing after 2:30 p.m. does not call for any trading halt.

A 15% movement in the Sensex or Nifty before 1 p.m. leads to suspension of trade for 1:45 hours while a 15% swing between 1 p.m. and 2 p.m. brings trading to a halt for 45 minutes. If the Sensex or Nifty hits the 15% limit after 2 p.m. then trading is suspended for the rest of the day. The maximum market-wide circuit breaker limit has been fixed at 20% and if this trigger is hit at any point of time during the trading session, then trading is halted for the rest of the day.

Are circuit limits revised often?

Earlier, when the concept of ciruit breakers for indices was introduced, the Securities and Exchange Board of India (SEBI) made it mandatory for exchanges to translate these trigger limits in absolute points on a quarterly basis.

At the end of each quarter, these absolute points were revised and made applicable for the next quarter. From 2013 onwards, the regulator directed stock exchanges to introduce daily calculation of circuit breaker limits based on the previous day’s closing level of the index.

Additionally, a pre-opening session of 15 minutes was mandated after trading resumed post the compulsory halt.