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What are price bands and circuit breakers?

Apurva Joshi
/ Categories: Knowledge
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What are price bands and circuit breakers?

What are price bands?  

Stock exchanges impose price bands on individual securities to limit volatility in prices. Daily price bands applicable on securities are as follows: 

- Daily price bands of 2 per cent, 5 per cent or 10 per cent either way on securities as specified by the exchange. 

- No price bands are applicable on scrips (also included in indices) on which, derivatives products are available. In order to prevent members from entering orders at non-genuine prices in such securities, the exchange may fix operating range of 10 per cent. 

- Price bands of 20 per cent either way on all remaining scrips. 

When the price of any stock reaches its specified upper band, it means that it has hit the upper circuit i.e. there are no sellers for the scrip for the day. Similarly, when the price of any stock reaches its specified lower band, it means that it has hit the lower circuit i.e. there are no buyers for the scrip for the day.

What are circuit breakers?  

If there is an abnormal price movement in an index, defined in percentage terms, the exchange can suspend trading. This is called hitting the circuit breaker. 

The index-based market-wide circuit breaker system applies at three stages of the index movement, either way at 10 per cent, 15 per cent, and 20 per cent. 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 the movement of either BSE Sensex or Nifty 50, whichever is breached earlier. 

For trigger limit of 10 per cent, if hit before 1 pm, then market or trading halts for 45 minutes. If hit at or after 1 pm upto 2.30 pm, then market or trading halts for 15 minutes. At or after 2.30 pm, the market or trading does not halt. 

For trigger limit of 15 per cent, if hit before 1 pm, then market or trading halts for 1 hour & 45 minutes. If hit at or after 1 pm upto 2 pm, then market or trading halts for 45 minutes. At or after 2 pm, the market or trading halts for rest of the day. 

For trigger limit of 20 per cent, if it hits any time during market hours then the market halts for rest of the day. 

Exchanges compute the index circuit breaker limits for 10 per cent, 15 per cent, and 20 per cent levels on a daily basis based on the previous day's closing level of the index. 

This circuit breaker scenario was recently seen in 2020, when trading on the bourses halted for 45 minutes on March 13 & 23 after benchmark indices hit the lower circuit of 10 per cent, led by the global sell-off on the rising worries amid the COVID-19 outbreak, followed by the imposition of nationwide lockdown. 

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