Stock markets are fast-paced entities that are susceptible to extreme price fluctuations. News, global events, or any other factor have its effects on the share market. Within such a volatile environment, it becomes essential to ensure stability and prevent sudden price movements. In order to curb such issues, market regulators around the globe have put in place certain plans and methods. Market-wide circuit breakers are one such mechanism.
Market-wide circuit breakers, as the name suggests, halt all trading activity in the market in case of extreme price movements. The circuit, in this context, refers to trading activities - the flow of assets, commodities, and resources. If the market conditions get too volatile, market-wide circuit breakers come into play. They offer traders and stakeholders more time to adjust and react to the volatility. They also allow time for the markets to stabilise.
Market-wide circuit breakers are contingencies that are put in place to halt all trading activities in the event that the market becomes too volatile. This volatility could be both an unprecedented decrease or an increase beyond some predetermined thresholds. But in most cases, market-wide circuit breakers are called to action when there is an abrupt dip. They are also known as stock market circuit breakers or trading halts.
Here are some important details regarding market-wide circuit breaks that you, as a participant in the market, should be aware of.
The circuit breakers are usually put into play when the market indices move up or down by a certain percentage. There are three stages to this - at 10 per cent, at 15 per cent and at 20 per cent.
The duration of the trading halt depends on certain variables. This includes the time of the breach and the magnitude of the fall. The duration can be extremely varied depending on these. Trade could remain halted anywhere between 15 minutes to the entire day.
The rules followed by the NSE, for instance, can be understood easily with the following table.
|Time of Breach →||Before 1 pm||Between 1 pm and 2:30 pm||After 2:30 pm|
|Breach Limit ↓||Halt Duration ↓||Halt Duration ↓||Halt Duration ↓|
|10 per cent →||45 minutes||15 minutes||No halt|
|15 per cent →||1 hour 45 minutes||45 minutes||Remaining Day|
|20 per cent →||Entire Day||Entire Day||Remaining Day|
Market-wide circuit breakers have the following uses.
Market-wide circuit breakers play a critical role when it comes to the maintenance of market stability by halting trading activities at crucial junctures. They are, however, rarely deployed. A recent market-wide circuit break happened in 2020 for 45 minutes. It was the first time in 12 years that such an event had occurred.
Market-wide circuit breakers are balanced in a way such that they do not restrict the market too much. It is essential to let the market function freely while also allowing investors to be confident. Current market-wide circuit breakers deftly play this role. Without mechanisms like this in place, investors could lose huge amounts of money in the face of unprecedented events that trigger fallouts.