Circuit breakers

Circuit breakers

Hi there..

As you would have observed , stock prices can move up or down due to a number of reasons. For example – earnings results, government policies, trends in the industry etc. Such prices movements are reasonable and logical.

But in some cases, stock prices may move up or down drastically, accelerated mostly due to fear or greed by speculators and manipulators. Such movements are harmful for the stock markets.

In order to control such heavy price fluctuations, stock exchanges have a system called ‘circuit breakers’, something that works similar to the electricity circuit breakers that we have at home.

Circuit breakers were first introduced in the trading system of Indian stock exchanges back in 1992 at the BSE. There are separate circuit breakers for the indices and individual stocks.

These control systems ensure sanity of the stock market and protects investors. These are also called circuit limits or price bands.

HOW DOES IT WORK?

When the volatility of a stock breaks a certain limit as decided by the exchange, trading in that stock is stopped for some time. The limit is fixed as a percentage of the stock’s price by the stock exchange. The rules for circuit breaking are decided by the Securities exchange Board.

For example if the regulators decide that the circuit limit for a stock is 15%, then, trading in that stock will be halted for the day, if the stock price moves up or down 15% in one day.

CIRCUIT LIMITS FOR SENSEX AND NIFTY

There are 3 circuit limits for indices – 10%, 15% and 20%.Circuit filter is applied to Sensex or Nifty whichever is breached first. The trigger of circuit limits also depends on the time at which it occurs.

10%  movement in either direction

• If the movement is before 1 pm – 1 hour halt
• If the movement is after 1 but before 2:30 pm – half an hour halt
• If the movement is after 2.30 pm – no halt

15%  movement in either direction

After the above mentioned halts, trading starts again. If the market hits 10% again, there will not be any halts, but if it breaches 15%, circuit limits comes to play again.

• If the movement is before 1 pm – 2 hours halt
• If the movement is after 1 pm but before 2 pm- 1 hour halt
• I the movement is after 2 pm – no further halt.

20%  movement in either direction

On resumption, if the market hits 20%, trading will be halted for the day.

The above percentage is calculated on the closing value of the Sensex or the Nifty on the last day of the immediate preceding quarter. So, for deciding the circuit limit for the Jan-march 2011 period, the closing value of the bellwether indices on December 31, 2010 would be used.

WHAT HAPPENS TO ORDERS DURING CIRCUIT LIMITS?

If the market hits the upper or lower circuits, trading is halted and you cannot place orders until the market re-opens

If you have pending orders with the broker at the time of circuit break, such orders can be modified or cancelled only once the trading re-opens.

CIRCUIT LIMITS FOR INDIVIDUAL STOCKS.

Stock specific circuit filters are applied in both BSE and NSE index; the percentage for circuit filter limit is 2%, 5%, 10%, 20%. Not all stocks fall in the circuit limit category. There are stocks to which circuit limits are not applicable.

For newly listed companies, there is a circuit limit of 20% from the issue price.

That’s about circuit limits..

Bye for now …

….have a nice day !!