13.4 Circuit breakers
The exchange has put into implementation index based market-wide circuit breakers in compulsory rolling settlement with effect from July 02, 2001. In addition to the circuit breakers, price bands are also applicable on individual securities.
Index-Based Market-Wide Circuit Breakers
The index-based market-wide circuit breaker system applies at three stages of the index movement viz. at 10, 15 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 the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier.
A 10 per cent movement before 1 pm in any of the indices would ensure a market halt for one hour. If the movement takes place between 1.00 pm and 2.30 pm this would lead to a market halt for half an hour. But a market movement of 10 per cent does not lead to a halt if it happens after 2.30 pm. In case of a 15 per cent movement of either index, there shall be a two hour halt if the movement takes place before 1 pm. If the 15 per cent trigger is reached on or after 1.00 pm, but before 2:00 pm, there shall be a one hour halt. If the 15 per cent trigger is reached on or after 2.00 pm the trading shall halt for remainder of the day. In case of a 20 per cent movement of the index, trading shall be halted for the remainder of the day. These percentages are translated into absolute points of index variations on a quarterly basis. At the end of each quarter, these absolute points of index variations are revised for applicability for the next quarter. The absolute points are calculated based on the closing level of index on the last day of the trading in a quarter and rounded off to the nearest ten points in case of S&P CNX Nifty.
For example, Indian stock markets celebrated the winning of Congress-led UPA in the 2009 parliamentary election by breaking all past records and forcing the regulator to halt the trading for the day. The timeline for May 18, 2009 was as follows: 09.55 am: Market opens.09.56 am: S&P CNX Nifty crosses the 15 per cent threshold and thus trading halted for two hours. 11.55 am: Trading suspended for the entire day as the 20 per cent threshold level is breached.
At the end BSE Sensex was up by 2,110.79 point, closing at 14,284.21 while S&P CNX Nifty was up by 651.15 points, closing at 4,323.15.
Circuit Breaker - Price Bands
In case of stocks a circuit breaker is more commonly referred to as a price band. As the name suggests, it specifies the band within which the price of a particular stock can move freely. Once the price breaches the mentioned levels, it enters into a circuit - lower circuit on breaching the lower price level and upper circuit on breaching the upper price level. The daily price bands as applicable to securities are as below:
- Daily price bands of 2 per cent (either way) on securities as specified by the exchange.
- Daily price bands of 5 per cent (either way) on securities as specified by the exchange.
- Daily price bands of 10 per cent (either way) on securities as specified by the exchange.
- No price bands are applicable on scrips for which derivative products are available or scrips included in indices for which derivative products are available. In order to prevent members from entering orders at non genuine prices in such securities, the exchange has fixed an operating range of 20 per cent for such securities.
- Price bands of 20 per cent (either way) on all remaining scrips (including debentures, warrants, preference shares etc).
- The price bands for the securities in the limited physical market are the same as those applicable for the securities in the normal market. For the auction market a price band of 20 per cent is applicable. There are no price bands for those securities which are available for trading in the futures and options (F&O) segment and securities which form part of the indices on which trading is available in the F&O segment.
While the upper circuit benefits those who have already invested in the particular stock or the market, the lower circuit is completely opposite since it badly affects those having already invested in the market. This is because after a stock enters a lower circuit, it becomes difficult for the investor to sell the shares and recover the blocked money.