What is Circuit Breakers
Definition: Circuit breakers are pre-defined values in percentage terms, which trigger an automatic check when there is a runaway move in any security or index on either direction. The values are calculated from the previous closing level of the security or the index.
Usually, circuit breakers are employed for both stocks and indices. Many steps can possibly be taken after the breach of the circuit breakers.
Some of the popular ones are:
1. Halting of trade in a security or index for a certain period
2. Halting of trade in a security or index for the entire trading day.
In case of the first option, trading in the security is halted for a few minutes to few hours to allow trading activity to cool down among the market participants. This time period also allows market participants to absorb any sudden news development in a particular security or a set of securities and, thereafter, take a rational and measured approach towards the security during the rest of the trading session.
The percentage levels at which these circuit breakers are invoked are revised regularly, depending on the levels of the security or the index over a period. For example, a stock may have a circuit breaker at 20 per cent for certain period and, subsequently, it can be revised downward to 10 per cent as the stock exchange may deem fit.
Drawback:
1. The first downside of circuit breakers is that they prevent true price discovery in a stock both on its way up or down, at least for the limited time period they are imposed.
2. Secondly, they allow early investors (usually well-informed institutions or algo traders) to gain advantage and make a move before circuit breakers are eventually invoked, thereby restricting the moves of other investors, who make a move a little later in the day (usually retail investors).
Description: Circuit breakers are in place for various stocks on the Indian bourses. The usual values of these are 2 per cent, 5 per cent, 10 per cent or 20 per cent. Stocks that are traded in the derivatives segment do not have any circuit breakers. On the Indian stock exchanges, an index-based market-wide circuit breaker system applies at three stages of the index movement on either side, viz. at 10 per cent, 15 per cent and 20 per cent. These circuit breakers, when triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide. Market-wide circuit breakers are triggered by movement of either the BSE Sensex or the Nifty50, whichever hits the trigger first.
After index-based market-wide circuit filter is breached, the market re-opens with a pre-open call auction session. The extent of the duration of the market halt and pre-open session is as given below:-
Usually, circuit breakers are employed for both stocks and indices. Many steps can possibly be taken after the breach of the circuit breakers.
Some of the popular ones are:
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1. Halting of trade in a security or index for a certain period
2. Halting of trade in a security or index for the entire trading day.
In case of the first option, trading in the security is halted for a few minutes to few hours to allow trading activity to cool down among the market participants. This time period also allows market participants to absorb any sudden news development in a particular security or a set of securities and, thereafter, take a rational and measured approach towards the security during the rest of the trading session.
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If the volatility or big moves are still not controlled when trading resumes after a temporary halt, then the second option is invoked and trading is halted for the entire day.The percentage levels at which these circuit breakers are invoked are revised regularly, depending on the levels of the security or the index over a period. For example, a stock may have a circuit breaker at 20 per cent for certain period and, subsequently, it can be revised downward to 10 per cent as the stock exchange may deem fit.
Drawback:
1. The first downside of circuit breakers is that they prevent true price discovery in a stock both on its way up or down, at least for the limited time period they are imposed.
2. Secondly, they allow early investors (usually well-informed institutions or algo traders) to gain advantage and make a move before circuit breakers are eventually invoked, thereby restricting the moves of other investors, who make a move a little later in the day (usually retail investors).
Description: Circuit breakers are in place for various stocks on the Indian bourses. The usual values of these are 2 per cent, 5 per cent, 10 per cent or 20 per cent. Stocks that are traded in the derivatives segment do not have any circuit breakers. On the Indian stock exchanges, an index-based market-wide circuit breaker system applies at three stages of the index movement on either side, viz. at 10 per cent, 15 per cent and 20 per cent. These circuit breakers, when triggered, bring about a coordinated trading halt in all equity and equity derivative markets nationwide. Market-wide circuit breakers are triggered by movement of either the BSE Sensex or the Nifty50, whichever hits the trigger first.
After index-based market-wide circuit filter is breached, the market re-opens with a pre-open call auction session. The extent of the duration of the market halt and pre-open session is as given below:-