Home/Blogs/What Are Market Wide Circuit Breakers

What Are Market Wide Circuit Breakers

26 Jul 2023

Introduction

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.

What are Market-Wide Circuit Breakers?

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.

When are market-wide circuit breakers used?

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. 

​Who activates market-wide circuit breakers?

In India, market-wide circuit breaker limits are set by SEBI. The market-wide circuit breakers can be activated on either the exchange: the BSE or NSE. It depends on which touches the limit first. 

How long can a market-wide circuit breaker stay activated?

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

 

What are the Uses of A Market-Wide Circuit Breaker?

Market-wide circuit breakers have the following uses.

  1. Protects investors: They provide a safeguard for investors. They get time to process all the new information about the market and act accordingly and prevent selling in panic. 
  2. Discovery of prices: Traders can get time to define the values of the assets within the volatile setting of the market. The prices can be brought back to a point where fair trade can be maintained.

Closing Thoughts

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.

 

Related Articles: Forex Market Opening And Closing Time In India | Factors to consider when opening a demat account

Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C