What is circuit breakers and price bands in Stock Market

In this article, you will get everything you need to know about the circuit breakers, upper and lower circuit limits, price bands and what happens when a stock or index hits any of the limits.

The Stock market moves on the basis of demand and supply in the market. However, in the event of negative or positive news, the stock market can move by a great amount. It happens due to a very high demand or supply in the market.

If more buyers and sellers started trading due to panic in the market, then it increases volatility in the market, and may put retail and other investors at a disadvantage.

To manage this type of volatility, SEBI has introduced circuit limits or filters in the market. It’s also referred to as a circuit breaker.

Therefore, a circuit filter or limit will ensure that there is no extreme price movement in the market and investors are protected.

Now what is a circuit breaker and how is it defined?

What is Circuit Breaker

A circuit breaker is nothing but a range, it includes a lower limit called lower circuit and an upper limit called an upper circuit. On a given trading day, the market can trade within this range.

Benchmark indices can move only within a prescribed range. It’s basically a range provided for each index. The upper and lower ranges defined are known as upper and lower circuits respectively. These limits are known as circuits.

The index can not fall below the lower limit or rise above the upper limit. These upper and lower limits are calculated based on the previous day’s closing price.

Circuit breakers is a measure that temporarily halts trading on an exchange to curb panic-selling and can also be triggered on the way up with manic-buying. Circuit breaks are commonly used for stocks as well as broad market indexes like the NIFTY 50 and SENSEX.

Similarly, for individual stocks, you will find the same concept. It’s also referred to as stock price bands. Both act in the same way.

The upper circuits are ceiling prices. The lower circuits are floor prices of the stock or indices.

In India, Securities and Exchange Board of India (SEBI) fixes the circuit limit for market indices. 

Market regulator SEBI has set circuit filters only for NIFTY 50 and SENSEX benchmarks.

When these indices breach the circuit limits, a temporary trading halt occurs depending on the limit fixed and time at which it occurs.

Circuit limits or price brands for individual traded stocks are controlled by the stock exchanges. Daily price bands of 2%, 5%, 10% and 20% are fixed depending on the category of the stock traded in the market. 

When a stock hits the circuit limits, the exchange will temporarily suspend trading of that particular individual stock.

No price bands are applicable on scrips on which derivative products are available. 

Scrips on which no derivatives products are available but which are part of Index Derivatives, are also subjected to price bands.

SEBI manages the Price bands for IPO stocks.

Circuit Breaker for indices

For the indices, SEBI has set circuit breakers limit at 10%, 15% and 20%.

In case the market hits the 10% limit, trading can be halted between 15-45 minutes depending on the time of breach. 

Likewise, if the 15% limit is hit, trading can be halted for 45-75 minutes, while the 20% limit leads to closure of markets for the rest of the day.

When these markets hit the circuit breakers, it brings a coordinated trading halt in all equity and equity derivative markets nationwide. 

The extent of duration of the market halt and pre-open session is as given below:

When Trigger limit is 10% (either way)

When trigger limit is 15% (either way)

When trigger limit is 20% (either way)

Exchange shall compute the Index circuit breaker limits for 10%, 15% and 20% levels on a daily basis based on the previous day’s closing level of the index rounded off to the nearest tick size.