Market Circuit Breakers Explained: Yesterday i.e. on 23rd March 2020, the Indian equity market hit a lower circuit breaker. The BSE benchmark index ‘Sensex’ fell over 10% in the morning because of which trading was halted on both NSE & BSE for 45 minutes.

A similar scenario happened on 13th March 2020 (10 days back), when nifty hit the lower circuit resulting in closing off the market for an hour (45 mins halt and 15 mins pre-opening session).

Anyways, what are these circuit breakers that result in halting the normal trading in the market? This is what we are going to understand in this article. Here, we’ll discuss what exactly are circuit breakers and in which situations trading are stopped in the Indian stock market and for how long. Let’s get started.

What is Market Circuit Breakers?

The Indian stock exchanges have implemented the index-based circuit breakers according to the guidelines of SEBI w.e.f 02 July 2001.

These circuits (lower or upper ) are an automatic mechanism to stop a freefall/crash or a massive surge in a security or an index during trading hours. If the index hits the lower or upper circuit, the trading session is stopped for some time. Overall, market circuit breakers are used to check the volatile swings in the market.

According to the SEBI rules:

The circuit breakers for the indexes will be applied at three stages, whenever the index crosses 10%, 15%, and 20% level. The stock exchanges calculate these Index circuit breaker limits levels based on the previous day’s closing level of the index.

When these circuit breakers are triggered, it will result in a trading halt in all equity and equity-based derivative markets nationwide.This means that if the index crosses its first stage of 10% (either upside or downside), the trading will halt in entire India i.e. no trading will take place on NSE and BSE.

Moreover, this circuit breaker can be triggered by the movement of any of the market benchmark index (Sensex or Nifty) whichever crosses the limit level first.

Let’s say Sensex fell above 10% and nifty is still at 9.7% down. In this scenario, the circuit breaker will be triggered as Sensex has breached the level. The circuit breaker does not require both the indexes to breach and either one crossing the level will trip the circuit breaker.

After the first circuit filter is breached, the market will re-open with a pre-opening session after a specified time. The extent of market halt and the pre-open session decided by the SEBI is given below:

Source: NSE Circuit Breakers

Circuit Breaker Recent Example

Let’s understand the concept of circuit breaker better with the help of the same example discussed at the starting of this post.

On March 23, 2020, the Sensex lost 2,991 points or 10% at 9: 58 am. At the same time, Nifty 50 too declined 9.40% or 822 points to 7,923. This led to led to the triggering of circuit breakers on BSE and NSE. Trading on both these exchanges stopped and commenced at 10: 58 am (45 min halt and a 15-minute pre-open session).

Although market circuits breakers intend to control the volatility, however, it cannot stop a falling market. By the end of the day, Sensex and nifty post biggest one day fall ever. Sensex tanked nearly 4,000 points yesterday.

(Source: Bloomberg Quint)

This is the second time this year (2020) when the Indian indices have hit the circuit breaker. On March 13, Nifty plunged 10.07% or 966 points to 8,625 at 9:20 am after which trading was halted for 45 minutes in the Indian equity market. Sensex plunged 3,090 points or 9.43% in early trade that day. However, as Nifty breached the circuit first, the trading session was stopped for an hour.

Also read: How Much Can a Share Price Rise or Fall in a Day?

Summary

Market Circuit Breakers are an automatic mechanism used to check the volatile swings in the market. When these circuit breakers are triggered, they result in a trading halt in all equity and derivative markets nationwide.

This year the Indian stock market has already witnessed two lower circuits in the month of March. This is mainly because of the rising cases of coronavirus and the various announcements of the lockdown of states in India. If the Indian government and its people are not able to contain the outbreak of this coronavirus, we may expect other circuit breakers in the market soon. Take care. Till next time…!

Kritesh Abhishek

Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.