The stock market is very volatile and ever-changing. A new investor may get nervous as the price changes rapidly. Circuit breakers automatically halt trading when prices move sharply, either rising rapidly or falling steeply, as is the case in markets like India. There are certain parameters on which they are based, usually in percentages.
This article will help you understand the circuit breaker in detail, along with its operation. It will also improve your knowledge of how the market movements affect these.
What Are Circuit Breakers?
During times of high volatility, circuit breakers and predetermined thresholds temporarily stop trading on stock exchanges. These occur when benchmark indices, such as the Nifty 50 or Sensex in India, move more than a predetermined percentage, either higher or lower, during a trading session.
The goal is to:
- Allow investors time to calmly evaluate the situation.
- Avoid making irrational decisions
- Keep trading in order.
Key Parameters:
The following table outlines the trading halt durations based on the percentage movement of benchmark indices and the time at which these thresholds are breached during a trading session:
| Market Movement (%) | Trigger Time | Trading Halt Duration |
| 10% | Before 1:00 PM | 45 minutes |
| 10% | Between 1:00 PM – 2:30 PM | 15 minutes |
| 10% | After 2:30 PM | No halt |
| 15% | Before 1:00 PM | 1 hour 45 minutes |
| 20% | No fixed time, it can happen anytime | Remaining day |
How Circuit Breakers Work in Real-Time?
1. Index-Based Circuit Breakers
When a benchmark index, such as the Nifty 50 or Sensex, moves significantly (either up or down) by 10%, 15%, or 20% from its closing value the day before, index circuit breakers are activated.
Here’s a detailed explanation of how this procedure operates:
- Predetermined Trigger Levels: The NSE/BSE determines absolute index values prior to market opening that represent 10%, 15%, and 20% movements from the close of the previous day.
- Real-Time Monitoring: Trading systems continuously keep an eye on the index in real-time after the market opens.
- Trigger Detection: Trading is stopped throughout the market, including the cash and derivatives segments, based on pre-approved time limits based on the time the breach occurs, if the index reaches any of these thresholds.
2. Stock-Specific Circuit Filters
The market as a whole is protected by index circuit breakers, but individual stocks also have price bands, which are referred to as stock-level circuit filters. These stop wildly fluctuating share prices, particularly in stocks that are illiquid or volatile.
How it actually operates:
- Let’s say a small-cap stock opens at Rs. 200 and has a 10% circuit limit.
- The system automatically blocks additional buy/sell orders if market orders drive the price to Rs. 220 or Rs. 180 during the day.
- Only when the next trading day starts or the exchange decides to change the limit (in certain circumstances) does trading resume.
3. Real-time Market Execution Flow (With Timeline)
The example below will develop your understanding:
| Time | Event | Action |
| 9:15 AM | Market opens | All stocks trade normally |
| 10:30 AM | Sensex drops 10% (hits 10% lower circuit) | Trading halts for 45 minutes |
| 11:15 AM | Trading resumes with re-evaluation by participants | New orders allowed |
| 1:00 PM | The index falls further, reaching the 15% threshold | 1-hour 45-minute halt or next-level actions |
| 2:45 PM | Trading resumes or is halted for the rest of the day | As per SEBI/BSE/NSE rules |
Why Are Circuit Breakers Important for Investors and Markets?
After understanding the working of circuit breakers, let us look into their importance:
- Avoid Panic Reactions: Hasty decisions are frequently the result of unexpected market crashes. Investors can pause, obtain information, and prevent panicked selling by implementing a trading halt.
- Stabilise Price Movements: Circuit breakers reduce sharp swings and aid in maintaining reasonable price levels by stopping trading at strategic moments.
- Safeguard Retail Investors: During significant fluctuations, individual investors are more prone to panic. A brief pause minimises emotional losses by giving them time to think things through.
- Encourage Market Integrity: By giving businesses or regulators time to provide clarifications, trading halts help stop trades that are motivated by false information.
Bottomline
The conclusion can be drawn that circuit breakers are essential for ensuring the safety of retail and small investors. It acts as a safety net in the volatile stock market. Understanding it may be a task in the beginning, but once understood, it becomes very helpful. When the market moves too quickly either way then these are automatically applied to break the circuit.
This provides relief to the investors, especially those who are new to trading, to understand the market properly and efficiently.