What are Circuit filters / Circuit breakers? How do they work?

Circuit filters: Circuit filters is a regulatory mechanism used by the stock exchanges to prevent the market volatility. Markets often see stock prices moving up and down very drastically accelerated by the investor’s sentimental decisions and the choices made by the speculators. To curb the excessive price fluctuations, circuit filters are set by the exchanges with respect to specific securities from time to time.

These are called circuit filters/circuit breakers because their job is similar to the electric circuit breakers we seen at home that is used to protect the electric circuit from the excess current or short circuit. Besides for stocks, circuit limit gets fixed for stock indices like Sensex and Nifty also.

How it works?

As a part of this, Stock exchanges set price bands with upper and lower limits within which the stocks are allowed to fluctuate in a particular day. If these limits are hit in either direction, Trading of these stocks gets halted temporarily or for the rest of the session depending on the circuit limit and the time when the circuit limit gets triggered.

In India, index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way i.e. at 10%, 15% and 20%. Circuit filters are get triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached earlier.

Circuit breaker for stock Index:

Whenever, these filters get triggered trading will be halted in all equity and equity derivative markets nationwide. The halting time depends on the time at which the circuit breakers are triggered. The extent of duration of the market halt and pre-open session is as below:

10% movement in either sides:
1 hour halt – If they are triggered before 1 pm
30 minutes – If they are triggered before 2:30 pm but after 1 pm
No halt – If they are triggered after 2:30 pm
15% movement in either sides:
2 hours halt – If they are triggered before 1 pm
1 hour halt – If they are triggered before 2 pm
No halt – If they are triggered after 2 pm
20% movement in either sides:
In this case, the trading will be halted for the rest of the day

Note: The extent of duration of the market halt listed above shall be reduced by 15 minutes for pre-open call auction session. So, effectively the duration of halt in case of 10% drift is 45 minutes, 15 minutes & for 15% drift is 1 hour 45 minutes and 45 minutes depending the time of the trigger.

How these trigger limits are computed?

Exchange computes 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.

Reduced circuit filters for illiquid securities:

In case of illiquid Securities, the circuit filters applicable are 10% or 5% or 2% as the case may be, based on the criteria decided by the Surveillance Department of the exchanges.

Circuit filters on securities with derivative products:

No circuit filters are applicable on Securities on which derivative products are available. However, BSE imposes 10% dynamic circuit filter on these Securities to avoid punching errors.

Continuous review by stock exchanges:

Stock exchanges BSE and NSE continue to review the performance of each circuit filter. Over a period of time, if a stock has become less volatile, stock exchanges may relax the circuit filter limit for that particular stock. Refer http://www.bseindia.com/markets/equity/EQReports/CFSummary.aspx for group wise summary details of BSE Circuit Filters.

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