Circuit filters in the Indian stock market are regulatory limits imposed on stock price movements to prevent extreme volatility. These limits, set by SEBI, halt trading temporarily when a stock’s price crosses predefined upper or lower percentage levels, ensuring market stability and investor protection.
Content:
- What Are Circuit Filters?
- How Do Circuit Filters Work in Stock Trading?
- Types of Circuit Filters
- What Triggers a Circuit Filter in the Stock Market?
- Circuit Filters Importance
- How Do Circuit Filters Impact Liquidity and Volatility?
- What Happens When a Stock Hits the Upper or Lower Circuit?
- How Are Circuit Limits Set by SEBI and Stock Exchanges?
- Benefits of Circuit Filters
- Difference Between Circuit Filters and Trading Halts
- Circuit Filters in the Indian Stock Market – Quick Summary
- Circuit Filters and Their Role in Stock Trading – FAQs
What Are Circuit Filters?
Circuit filters are predefined price limits set by stock exchanges to prevent excessive volatility in stock prices. They restrict the maximum percentage a stock can rise or fall in a single session, ensuring orderly trading and protecting investors from extreme price fluctuations.
Circuit filters help stabilize markets by temporarily halting trading when prices hit the upper or lower limits. These limits vary based on the stock’s category and past volatility, reducing the chances of speculative trading causing market disruptions.
They apply to individual stocks and indices, preventing panic-driven selling or overenthusiastic buying. By setting percentage-based thresholds, exchanges maintain market discipline, allowing traders to reassess conditions before making further investment decisions during volatile trading sessions.
How Do Circuit Filters Work in Stock Trading?
Circuit filters function by setting price movement limits for stocks and indices. If a stock crosses the predefined upper or lower limit, trading halts temporarily or for the rest of the session, depending on the severity of the movement.
These filters are divided into 5%, 10% and 20% levels based on stock volatility. Lower limits apply to high-risk stocks, while stable stocks have broader price movement allowances. Exchanges monitor price movements to enforce the filters effectively.
When a stock hits a circuit limit, trading resumes after a cooldown period or remains suspended until the next session. This mechanism prevents panic-driven price swings and allows investors time to react logically to market trends.
Types of Circuit Filters
The main types of circuit filters include stock-specific circuit filters and index circuit breakers. Stock-specific filters set price limits for individual stocks, while index circuit breakers halt trading when major indices like NIFTY or SENSEX breach predefined percentage thresholds, ensuring market stability and controlled volatility.
- Stock-Specific Circuit Filters – These filters apply to individual stocks, restricting price movements within predefined percentage limits like 5%, 10%, or 20%. They prevent excessive volatility, ensuring orderly trading while allowing fair price discovery based on market conditions.
- Index Circuit Breakers – These filters apply to major indices like NIFTY and SENSEX, halting trading if indices fall or rise by 10%, 15%, or 20%. These circuit breakers prevent panic selling and excessive speculation in extreme market conditions.
- Dynamic Price Bands – These temporary limits prevent stocks from fluctuating abnormally in a short period. Applied to derivatives and newly listed stocks, dynamic price bands adjust based on trading activity to maintain stability.
- Commodity Circuit Filters – Used in commodity exchanges, these filters limit daily price changes for traded commodities like gold, crude oil and agricultural products. They prevent excessive speculation and protect traders from extreme volatility in the commodity market.
What Triggers a Circuit Filter in the Stock Market?
A circuit filter is triggered when a stock’s price moves beyond its assigned percentage limit during a trading session. These limits prevent excessive speculation and protect traders from sharp market movements caused by sudden news, events, or market trends.
Triggers include earnings announcements, government policies, macroeconomic changes, or speculative activity. If a stock rises sharply due to positive news, it may hit the upper circuit; if negative news spreads, it may trigger the lower circuit.
Circuit filters help avoid artificial price manipulation by restricting wild fluctuations. If a stock is continuously hitting the circuit limit, regulators may revise thresholds or impose additional surveillance to ensure fair market practices.
Circuit Filters Importance
The main importance of circuit filters is preventing extreme price volatility, protecting investors, ensuring market stability and maintaining fair trading practices. These limits help regulate sudden price fluctuations, reducing panic-driven trading and speculation while allowing markets to function in an orderly and efficient manner.
- Prevents Extreme Volatility – Circuit filters restrict sudden price fluctuations, preventing stocks and indices from moving excessively in a single session. This control helps maintain a stable trading environment, reducing risks for both retail and institutional investors.
- Protects Investor Interests – By capping price movements, circuit filters shield investors from extreme losses due to panic-driven trading. They ensure fair trading conditions, preventing stock manipulation and excessive speculation that could harm small traders and long-term investors.
- Ensures Market Stability – These filters maintain market order by pausing trading when prices breach set limits. This allows investors to reassess market conditions, preventing irrational decision-making and providing time for markets to stabilize.
- Enhances Fair Trading Practices – Circuit filters prevent unfair price manipulation by limiting speculative activity. By ensuring that stock movements are based on genuine demand-supply factors, they promote transparency and reliability in the stock market.
How Do Circuit Filters Impact Liquidity and Volatility?
Circuit filters reduce volatility by capping extreme price movements, ensuring controlled market fluctuations. They prevent panic-driven selling or buying, allowing investors time to make informed trading decisions rather than reacting impulsively to sudden price changes.
However, circuit filters can sometimes impact liquidity. When a stock hits the limit, buyers or sellers may hesitate to place further orders, leading to reduced trading volume. This can temporarily limit price discovery and affect market efficiency.
While they stabilize markets, frequent circuit limit hits may signal excessive speculation or fundamental issues. In such cases, exchanges may revise circuit limits or impose trading restrictions to prevent manipulation and protect retail investors.
What Happens When a Stock Hits the Upper or Lower Circuit?
When a stock hits the upper circuit, no more buy orders are allowed above the limit, but existing sellers can place orders at or below the circuit price. This creates demand pressure, often indicating bullish sentiment.
When a stock reaches the lower circuit, selling is restricted beyond the limit, but buyers can place bids at or above the circuit price. This often signals panic selling or negative sentiment, discouraging further downward pressure.
If circuit limits persist for multiple sessions, exchanges may investigate potential price manipulation or speculative trading patterns. Adjustments to circuit filters, surveillance measures, or temporary trading halts can be imposed to maintain market stability.
How Are Circuit Limits Set by SEBI and Stock Exchanges?
SEBI and stock exchanges determine circuit limits based on stock category, trading volume, volatility history and market capitalization. Stocks with higher risk levels often have stricter limits, while stable stocks have broader price movement thresholds.
These limits are revised periodically based on market conditions. Exchanges assess price behaviour and adjust the filters to balance market stability with trading flexibility, ensuring a fair and orderly marketplace for all investors.
For indices like NIFTY and SENSEX, broader circuit breakers exist at 10%, 15% and 20% levels. When these limits are breached, trading halts across exchanges for specific durations, preventing widespread panic or irrational market reactions.
Benefits of Circuit Filters
The main benefits of circuit filters include controlling excessive volatility, protecting investors from sudden losses, preventing market manipulation, ensuring liquidity and stabilizing trading activity. These limits help maintain a fair, transparent and orderly stock market, reducing risks associated with extreme price fluctuations and speculation.
- Controls Excessive Volatility – Circuit filters prevent extreme price fluctuations, ensuring that stocks and indices do not move beyond predefined limits. This stabilizes markets, reducing the impact of speculative trading and sudden investor panic.
- Protects Investors from Sudden Losses – By capping price movements, circuit filters prevent drastic losses due to unexpected market swings. They provide investors time to react and make informed decisions instead of acting impulsively during volatile conditions.
- Prevents Market Manipulation – Circuit limits restrict artificial price movements caused by large speculative trades. This reduces unfair market practices, ensuring that stock prices reflect genuine demand and supply dynamics rather than manipulative trading strategies.
- Ensures Liquidity and Orderly Trading – By pausing trading when necessary, circuit filters allow markets to stabilize, ensuring that liquidity is not entirely drained. This helps traders execute transactions smoothly without extreme price variations disrupting the market.
Difference Between Circuit Filters and Trading Halts
The main difference between circuit filters and trading halts is their purpose and trigger mechanism. Circuit filters impose price limits on stocks or indices, while trading halts are temporary suspensions due to corporate announcements, regulatory interventions, or market-wide issues, ensuring fair and transparent trading conditions.
| Criteria | Circuit Filters | Trading Halts |
| Definition | Price limits are set on stocks or indices to control extreme volatility. | Temporary suspension of trading due to regulatory or corporate actions. |
| Trigger Mechanism | Activated when a stock or index moves beyond predefined percentage limits. | Triggered by major announcements, regulatory concerns, or technical issues. |
| Purpose | Prevents excessive price fluctuations and market manipulation. | Ensures fair disclosure of information and prevents disorderly trading. |
| Market Impact | Controls volatility, allowing orderly trading and price stability. | Halts trading completely, giving time for information dissemination. |
| Duration | Can last for a session or until the price stabilizes. | Varies from minutes to hours, depending on the reason. |
| Example | A stock hitting a 10% upper circuit stops further buying. | Trading halted due to an upcoming merger announcement. |
Circuit Filters in the Indian Stock Market – Quick Summary
- The main function of circuit filters is to regulate stock price movements by imposing upper and lower limits. These limits, set by SEBI, temporarily halt trading when breached, ensuring market stability, reducing volatility and protecting investors from extreme price fluctuations.
- Circuit filters are price limits set by stock exchanges to curb excessive volatility. They restrict how much a stock can rise or fall within a session, ensuring orderly trading and shielding investors from sudden, extreme market movements.
- Circuit filters work by setting predefined price thresholds for stocks and indices. If a stock surpasses these limits, trading is halted temporarily or for the session, depending on the severity of the price movement.
- The main types of circuit filters include stock-specific filters, which apply to individual stocks and index circuit breakers, which halt trading if major indices like NIFTY or SENSEX cross predefined percentage limits, ensuring market stability and reduced volatility.
- A circuit filter is triggered when a stock’s price moves beyond its assigned percentage limit. These limits help prevent excessive speculation and protect traders from sharp, sudden market fluctuations driven by news, events, or investor sentiment.
- The main importance of circuit filters is controlling extreme price volatility, maintaining market stability and ensuring fair trading practices. These limits help prevent panic-driven trades and speculation, allowing orderly market functioning while protecting investor interests.
- Circuit filters help reduce volatility by capping extreme price swings, ensuring controlled market fluctuations. They prevent panic buying or selling, giving investors time to make informed decisions rather than reacting impulsively to sudden stock price changes.
- When a stock hits the upper circuit, no buy orders are allowed above the limit, but sellers can place orders at or below the circuit price. This creates demand pressure, often signalling strong bullish market sentiment.
- SEBI and stock exchanges set circuit limits based on factors like stock category, trading volume, volatility history and market capitalization. High-risk stocks have stricter limits, while more stable stocks have broader price movement allowances.
- The main benefits of circuit filters include reducing excessive volatility, protecting investors from losses, preventing manipulation, ensuring liquidity and stabilizing market activity. These limits promote transparency, fairness and orderly trading by mitigating risks associated with sharp price swings.
- The main difference between circuit filters and trading halts is their function and trigger. Circuit filters impose price movement limits, while trading halts temporarily suspend trading due to corporate announcements, regulatory actions, or market-wide issues, ensuring fair trading conditions.
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Circuit Filters and Their Role in Stock Trading – FAQs
Circuit filters are price limits set by stock exchanges to prevent extreme volatility in stock prices. These filters restrict how much a stock can rise or fall in a single trading session, ensuring market stability and protecting investors from excessive speculative movements.
An upper circuit halts further buying when a stock reaches its maximum allowed price increase, while a lower circuit stops selling when a stock hits its maximum decline. These mechanisms prevent excessive speculation and provide time for market participants to reassess conditions.
Stock exchanges implement circuit filters to curb extreme price fluctuations, prevent panic-driven trading and reduce manipulation. By limiting sudden price changes, these filters maintain orderly trading, allowing investors to make informed decisions while ensuring fair market practices and overall stability.
When a stock hits the circuit limit, trading is either paused or restricted. No new orders can be placed beyond the set limit, reducing liquidity. Investors must wait for price corrections or regulatory actions before trading resumes normally.
If multiple stocks hit circuit limits on the same day, market-wide volatility increases. Exchanges may intervene by adjusting trading rules, imposing additional surveillance, or modifying circuit limits to prevent excessive speculation and potential instability across the broader stock market.
No, circuit filters vary based on stock category, liquidity and volatility. Stocks are assigned circuit limits of 2%, 5%, 10%, or 20%, with highly volatile or smaller-cap stocks typically having stricter limits to prevent manipulation and excessive price swings.
Short-term traders face challenges when stocks hit circuit limits, as liquidity decreases and exits become difficult. They may experience trapped positions, delayed executions, or missed opportunities, making it harder to capitalize on quick price movements in volatile trading sessions.
Yes, stocks can stay in circuit limits for multiple days if strong buying or selling momentum persists. Continuous upper or lower circuits may indicate speculative trading, leading exchanges to review limits, impose additional controls, or adjust surveillance measures.
Circuit limits are revised periodically by exchanges and SEBI based on stock performance, volatility and market conditions. If a stock shows consistent price movements beyond limits, adjustments are made to ensure fair trading and maintain a balanced market environment.
Global markets use circuit breakers at different index levels to prevent panic selling or excessive buying. Exchanges like the NYSE and NASDAQ apply circuit breakers at 7%, 13% and 20% declines, temporarily halting trading to allow markets to stabilize.
Disclaimer: The above article is written for educational purposes and the companies’ data mentioned in the article may change with respect to time. The securities quoted are exemplary and are not recommendatory.
