Stock Market Circuit Breakers are tools that temporarily stop trading on an exchange to prevent panic selling and extreme volatility. They help stabilize the market during significant price changes, ensuring orderly and fair trading conditions.
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What Are Circuits?
Circuits in the stock market are limits set on how much a stock price or index can move in a day. When these limits are hit, trading stops to prevent wild price swings and excessive volatility, helping maintain market stability.
A circuit sets a maximum percentage move for a stock or index. If this limit is reached, trading halts to allow traders to calm down and make better decisions, reducing the risk of panic-driven trading actions. For example, if a stock has a circuit limit of 10% and its price drops by 10% in one day, trading stops. This break helps traders think and make informed choices, reducing the chance of panic selling and irrational decisions.
What Are Circuit Breakers In Stock Market?
Circuit Breakers in the stock market are rules that stop trading when a stock index drops significantly in one day. They help maintain market calmness by giving traders time to react to substantial price drops and prevent market crashes.
These rules kick in when a stock index like the Nifty 50 or Sensex falls by a set percentage. The bigger the drop, the longer the trading halt, ensuring traders have time to assess the situation. For instance, if the Sensex drops by 10% from the previous close, trading might stop for 45 minutes. This pause helps investors think about the situation and make better decisions, preventing further market panic.
How Circuit Breakers Work?
Circuit breakers stop trading when a stock or index drops by a certain percentage. This mechanism prevents market crashes and helps control extreme volatility in the stock market. To understand how circuit breakers work, follow these steps:
- Monitor Market Movement: Exchanges continuously watch stock and index prices during trading hours. Advanced monitoring systems track price changes in real-time to identify any significant movements that might indicate market instability. This constant vigilance ensures that any drastic price changes are quickly detected.
- Set Trigger Levels: Specific percentage levels, known as triggers, are established to initiate trading halts. These triggers are based on the magnitude of price changes from the previous day’s closing prices. For example, triggers might be set at 10%, 15%, and 20% drops in major indices like the Nifty 50 or Sensex. These levels are designed to step in progressively as price movements become more extreme.
- Trigger Activation: When prices hit these predefined trigger levels, trading is automatically halted for a predetermined period. This pause can range from a few minutes to a couple of hours, depending on the severity of the price drop and the specific rules of the exchange. During this halt, traders have time to assess the market conditions, which helps to reduce panic and stabilize the market before trading resumes.
Stock Market Circuit Breaker Rules
The rules for stock market circuit breakers include specific guidelines and criteria to manage market volatility. These rules are designed to ensure orderly trading and to prevent panic-driven sell-offs.
Trigger Limits: Circuit breakers are activated at predetermined trigger limits, which are set as specific percentage declines in major stock indices. For example, in the Indian stock market, these triggers might be set at 10%, 15%, and 20% drops from the previous day’s closing prices.
Trigger Times: The timing of when these triggers can be activated during the trading day is crucial. Different percentages might apply at different times, such as early, mid, or late trading hours. This helps to manage market reactions more effectively throughout the day.
Market Halt Duration: When a circuit breaker is triggered, trading is halted for a specified period. The duration can vary depending on the severity of the decline and the specific rules of the exchange. Halts could last from a few minutes to a couple of hours to give traders time to assess the situation.
Pre-Open Call Auction Session: After a halt, a pre-open call auction session may be conducted. This session helps to determine the opening price of securities based on accumulated buy and sell orders, ensuring a smooth and orderly resumption of trading.
Post-Market Halt: Once the trading halt is lifted, the market resumes normal trading activities. The post-market halt phase ensures that all market participants have had the opportunity to process new information and make informed trading decisions.
| Trigger Limit | Trigger Time | Market Halt Duration | Pre-Open Call Auction Session |
| 10% | Before 1:00 pm | 45 Minutes | 15 Minutes |
| 10% | 1:00 pm to 2:30 pm | 15 Minutes | 15 Minutes |
| 10% | After 2:30 pm | No halt | Not applicable |
| 15% | Before 1:00 pm | 1 hour 45 minutes | 15 Minutes |
| 15% | 1:00 pm to 2:00 pm | 45 Minutes | 15 Minutes |
| 15% | After 2:00 pm | Remainder of the day | Not applicable |
| 20% | Any time during market hours | Remainder of the day | Not applicable |
Stock Market Circuit Breakers List
The stock market circuit breakers list includes the specific thresholds and rules that trigger trading halts to prevent excessive market volatility. These triggers are designed to maintain orderly market conditions and protect investors.
10% Trigger Limit
- Before 1:00 pm: Trading halts for 45 minutes.
- At or after 1:00 pm up to 2:30 pm: Trading halts for 15 minutes.
- At or after 2:30 pm: No trading halt is implemented.
15% Trigger Limit
- Before 1:00 pm: Trading halts for 1 hour and 45 minutes.
- At or after 1:00 pm before 2:00 pm: Trading halts for 45 minutes.
- On or after 2:00 pm: Trading halts for the remainder of the day.
20% Trigger Limit
- Any time during market hours: Trading halts for the remainder of the day.
Stock Market Circuit Breakers – Quick Summary
- Stock Market Circuit Breakers are mechanisms which are designed to halt trading temporarily to curb panic-selling and extreme volatility.
- Circuits are defined as levels where trading halts to manage market volatility, ensuring stability.
- Circuit Breakers In Stock Market are the tools that pause trading at set thresholds to prevent excessive market movements.
- Circuit Breakers Work by monitoring the market prices, sets trigger levels, and activates halts when necessary to control volatility.
- Stock Market Circuit Breaker Rules are specific rules for triggers, halts, and post-halt activities to maintain orderly trading.
- Stock Market Circuit Breakers Lists the thresholds (10%, 15%, 20%) and rules for trading halts at various market decline levels to manage stability.
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Circuit Breaker In Stock Market In India -FAQs
Stock market circuit breakers are mechanisms that temporarily halt trading when the market experiences extreme volatility. They are designed to prevent panic-selling and give investors time to assess market conditions before trading resumes.
Circuit breakers help the market by preventing drastic price drops and providing a cooling-off period. This can reduce panic, stabilize prices, and give investors time to make informed decisions, promoting overall market stability.
A circuit breaker is triggered when a stock or index falls by a predetermined percentage within a single trading day. Common trigger levels are 10%, 15%, and 20% declines from the previous day’s closing price.
The duration of a trading halt depends on the severity of the market decline. It can range from 15 minutes to the remainder of the trading day, based on the specific circuit breaker rules and the time of the trigger.
Yes, circuit breakers are effective in controlling market volatility. They prevent excessive price swings, reduce panic-selling, and ensure that trading resumes in an orderly manner, contributing to market stability.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:
