Recently you must have heard the name ‘Circuit Breaker’ in the news very often. On the back of the UPA government in India winning the elections, Nifty & Sensex touched their circuit filter of 10% within few seconds of opening and the trading was halted. In fact, the indices again triggered circuit breakers after the trading resumed and consequently the trading was suspended for the rest of the day.

So What is Circuit Breaker & How does it Work? -

Well, to avoid abnormal fluctuations in the share prices and index, circuit breakers are applied. According to the SEBI guidelines, stocks and indices can trade between a price band. During the day if prices of shares or the index fluctuates abnormally and touches either the high or low price bands, the trading halts.

This is how it works…

In case of the major indices – Nifty & Sensex – the duration of trading halt depends upon the quantum of the fluctuation and timing i.e. what time of the day such fluctuations take place. Circuit breakers apply in 3 levels – 10%, 15% and 20%. A fluctuation of 20% or above during the day in these indices halts the trading for the rest of the day.

A fluctuation of 15% before 1 pm halts trading for 2 hours. However, if it happens during 1 pm to 2 pm, trading gets suspended for the next one hour. But the trading halts for the whole day if either of the indices fluctuates by 15% after 2 pm.

In case either of these indices touches the price band of 10% till 1 pm, trading halts only for an hour. The trading recommences within half an hour if this happens during 1pm to 2.30 pm and there is no halt in trading if it happens after 2.30 pm.

These percentages – 10%, 15% and 20% – that trigger circuit breaker in the index are calculated on the closing value of the last day of the previous quarter.

As far as Individual stocks are concerned, price bands differ for different stocks and ranges from 2% to 20%.