Circuit breaker in the stock market is a regulatory mechanism that prevents trading for a specific amount of time when the market is too volatile. In simple words, if there is a massive fall or sudden surge in the stock market, trading is stopped at that time to let Investors Analyze the events and make better Decisions. This mechanism helps to prevent investors from surprises and curb huge losses on a particular trading day.
In 2001, index-based market-wide circuit breaker mechanism was implemented by the Securities and Exchange Board of India (SEBI). The Circuit breaker is implemented at 3 stages of the Market Index Movement- 10%, 15% and 20%.
There is a coordinated halt at all trading in the nation once the Circuit breaker is triggered. In India, the Circuit breaker can be triggered by Nifty 50 or BSE Sensex, whichever hits the lower or upper limit first.
There are two types of Circuit breakers
● Lower circuit breaker- This applies when an Index hits the lower level of the trigger in a free fall.
● Upper circuit breaker- This applies when an Index surges to an upper limit of the trigger during a sharp rise.
The Circuit breaker trigger limits for 10%, 15% and 20% are set daily basis by SEBI according to the previous day’s Index level rounded off to nearest tick size. When the Circuit breaker trigger limit is breached, trading is halted for different durations throughout the day. If the 10% or the 15% limit is breached before 1 pm, the trading is halted for 45 minutes or 1 hour 45 minutes respectively, with a 15 minutes pre-open call auction session before beginning of the session. If the 20% limit is breached any time of the trading hours, the market is halted for the remainder of the day. If the 10% limit is breached after 2:30 pm on a trading day, there is no halt and the trading continues till the end of the day. In the case of 15% limit breach, post 2:00 p.m the market is halted till end of trading hours.