Circuit Breakers: Why Trading on The Stock Market Halts?

A 12-year Old Record Break in the Stock Market.

Why Trading on The Stock Market Halts?

Answer: It is because of the circuit.

This guy’s face might pop in your head when we talk about the circuit!

But no, not Circuit from Munna Bhai movie, we are talking about circuits in the stock market. Spare this poor guy for now.

Imagine stocks getting traded and reaching unaffordable high prices or crashing unbelievably low without any stoppage. Scary right? Who wouldn’t be scared of losing huge sums of money?

Investors with stocks-in-hand would succumb to severe losses if the prices crash too low. On the other hand, where the prices would skyrocket, there would be a scarcity of buyers. Result? IMBALANCE in the market and INADEQUATE buyers or sellers according to the price situation.

Thus, SEBI, the prime controlling authority of the stock markets, came up with this brilliant technique of implementing market-wide circuits to protect the interests of investors with effect from July 2001. Circuit-breakers or simply circuit is basic for understanding the share market. I’m sure by now, you are curious to learn about Circuit breakers.

What is this “circuit”?

Simple: Circuit is a mechanism or a stoppage range, below or above which there can be no trading.

The higher end of the range is called the Upper Circuit and the lower side is called the Lower Circuit.  The market is allowed to fluctuate only between this benchmark range of the upper and lower circuits. Such a stoppage on the “market” is called circuit while that on a particular “stock” is called “price band”. This mechanism is used only for intraday transactions.

Stoppage Range on:

  • Market / Indices is called circuit
  • Stock is called price band

SEBI decides the circuit on the overall market on a daily basis, by considering the closing market points from the previous day as the base.
Circuits a.k.a circuit-breakers are different for different world markets. But for Indian Stock markets, SEBI has decided 3 points, of 10%, 15% and 20%, on hitting these, the market gets halted for trading, automatically for a stipulated period during a day.

Why is a circuit required in stock markets?

  • To prevent major loss of capital of retail investors from sudden swings in the market
  • To control extensive price volatility in the market
  • To reassess speculations in the market
  • To curb price manipulations by stock operators

Market Halt

Try to remember your childhood days, when your mother would put you on a time-out because you breached the rules laid down for kids of the house. For example, she restricted you to go out and play with your friends because you watched TV for 2 hours while you were allowed to limit watching TV only for 1 and a half hours. Now, she asks you to finish homework for half an hour and later go to play with your friends. A time-out and sadness for half an hour and things get back to normal!

Similarly, SEBI being the authoritative body for the market disciplines, checks and prevents acute price fluctuations by implementing an automatic time-out. When the market fluctuates immensely and hits the circuit points implemented by SEBI during the day, either by hitting the upper circuit or lower circuit, the market comes to a total halt.

A market halt is a situation where stocks cannot be traded until the halt comes to an end. Duration of market-halt can range between 15 minutes to 1 hour 45 minutes or for the remaining part of the day, depending on the trigger point hit, which means no trading in all equity and equity derivative markets nationwide. The circuit-breakers of 10%, 15%, or 20% are triggered by fluctuations in NIFTY 50 or the BSE whichever hits the circuit points earlier.

For example: Consider on NSE, based on Nifty 50’s closing of 8250 on 10th of April, the Nifty’s circuit trigger limit(movement on the upper and lower side) for 11th April would be 10% (825 points), 15% (1237 points) and 20% (1650 points).

Shortly put The above table shows, that the market will come to a halt for 45 minutes if the circuit breaker is hit by the trigger limit of 10% before 1 pm.

This means, if the market points rise by 10% from the previous day’s closing or fall below 10% from the previous day’s closing level, there shall be no trading across the Indian stock market for 45 minutes.

Imagine the nail-biting tension created by market halts if you hold any stock and are eager to trade it but can’t because of the market halt! You will definitely be under the immense pressure of betting your money based on market movements.

12-year record broken in 2020

You would be surprised to know that there was no market halt for the last 12 years! All jolly and glory! But the rise of the COVID-19 pandemic broke the 12-year-old trend. Markets stopped and so did investors’ hearts on March 13, 2020! Rise in a global panic due to the coronavirus and Wall Street crashing to its circuit limits multiple times in a short span, increasing the number of cases in India and India recording its first death due to the virus are to be blamed on.

All indices in red and red signal for investors too

The stock market had to be temporarily halted due to a steep crash of a 10% trigger. Nifty fell by 10.07% and BSE by 9.4% shortly after the market opened. The market reopened after 45 minutes. However, the negativity seemed to take over again within 2 weeks and the market crashed again by 10% trigger on 23rd March and logged its biggest loss ever!

This could be because of the cumulative effect of the earlier halt, the government imposing lockdown over 70+ districts, and zoom in COVID infected cases. It’s like, you fall while bicycling and when you get up, you realize your cycle chain has splintered! Disappointing, right?

L/U of price-band of a stock

A similar stoppage or circuit for shares of a company is called price-band. The lower end of the price-band is called the lower limit (price below which the share cannot be traded) and the upper-end is called the upper limit (maximum price at which the share can be traded).

Fun fact is, there is no price-band on the first day of listing of share! It can get listed at any high/ low price! Read my article about Rossari Biotech IPO where the share price was recorded at 58% over its issue price!

Let’s discuss price-band in the next article in a detailed but simple manner.

Imagine, 88,82,024 buyers for a share and zero sellers! Anything is possible in the stock market! Wait for it!

Thank you for reading.

Stock Sandhya

P.S. Want to learn more about circuit breakers? Watch this video.

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