How SEBI Regulation on Circuit Breakers work?
Circuit breaker limit changes everyday and stock keeps moving from one circuit breaker category to another, based on previous day’s closing price. The intention of introducing the circuit-breaker was to reduce excessive speculation by stopping order flow and help improve market liquidity. The concept of circuit breaker was laid back to 1987 crash of US markets. This crash left the surveillance system of US exchanges to introduce the concept of circuit breakers. In India, both NSE and BSE introduced the concept of circuit breaker. NSE has introduced it post 2000. Circuit breaker system applies to both stocks and market as a whole.
Index wide circuit Limit
The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE S&P CNX Nifty, whichever is breached earlier. In case of a 10% movement of either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market shall continue trading. In case if the market hits 10% before 1 p.m. then as explained there would be a one hour halt in trading and after resumption of trade in case if the market hits 15% in either index, then there shall be a two-hour halt. If the 15% trigger is reached on or after 1:00p.m. but before 2:00 p.m., there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading shall halt for the remaining part of the day. As explained if the market fails to resume at 10% then the next limit is placed at 15% and finally at 20%. In case if market fails to resume from 15% and if it hits 20% irrespective of the time, the trading shall be halt for remaining part of the day.
Stock wise circuit limits
Both NSE and BSE have implemented the circuit limit system on the stocks. They have applied the stock wise circuit limit system at four levels i.e. 2%, 5%, 10% and 20%. Circuit limits like any other concept have both pros and cons. On the positive side, with the presence of circuit filters, the traders/investors’ fear of erosion of wealth is not rapid when compared to not having circuit limits. However, it may not be true with in all the cases. Many times, the stock might see a rise due to announcement of any corporate action. In that case, the rise of stock beyond a limit might be genuine but still, due to application of this limit the trading in stock is held. The need for circuit-filters can be questioned on several grounds. For instance, empirical evidence on the effectiveness of price limits, circuit-breakers and trading halts is ambiguous. But in the case of specific situations where it is clear that the equilibrium value of the asset will change, then it makes no sense to have circuit breakers.
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Comments
Dear Sir,
Can a circuit of a company change?
For example: If a X company has a circuit of 5%, can that circuit be changed to 10% or 20%?
If it can, then how is it possible?
Kindest regards.
Adi.
thats really gr8 if some one is sharing his knowledge