Recently a circuit breaker was triggered in the Indian stock markets for the first time since 2009 as indexes plunged more than 10 percent, halting trading for 45 minutes.
More about the news:
- Bombay Stock Exchange (BSE) recently experienced the second biggest single-day fall in its history as it fell by 8.2 per cent, slightly lower than the 11 per cent fall it saw during the 2008 financial crisis.
- The Indian stocks recovered on Friday afternoon as the National Stock Exchange (NSE) Nifty 50 jumped by 3.98 per cent, while the S&P BSE Sensex jumped by 4.23 per cent.
Reason behind triggering circuit breaker
- Impact of outbreak of COVID-19:
- This fall in the stocks began in January, when China started reporting a sharp increase in the number of COVID-19 cases.
- Amid the coronavirus outbreak several countries have shut their borders affecting airlines, tourism and the hospitality sectors and has led to a scare among market participants worldwide.
- Worldwide scenario: Recently the New York Stock Exchange (NYSE) also saw a seven per cent drop in the S&P 500 led to a 15-minute halt in trading as circuit breakers were triggered.
About Circuit Breakers in Stock Market
They are also called a 'collar' and are triggered to prevent markets from crashing, which happens when market participants start to panic induced by fears that their stocks are overvalued and decide to sell their stocks.
They temporarily halt trading if prices rapidly move outside of pre-determined bounds.
The system of circuit breakers has been revised several times based on feedback from past crises.
Lower and Upper Circuit
Lower or upper circuit is an automatic mechanism to stop a freefall or massive surge in a security or an index during trading hours.
Upper Circuit is the limit above which a stock price cannot trade on a particular trading day. On the other hand, the lower circuit is the limit below which a stock price cannot trade on a particular trading day.
Index-Based market-wide circuit breakers in India
In June 2001, the Securities and Exchange Board of India (SEBI) implemented index-based market-wide circuit breakers.
This system applies at three stages of the index movement, at 10, 15 and 20 per cent.
What happens after the triggering of circuit breakers?
When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.
Duration of halt: Trade could be halted for 15 minutes up to the whole day.
A detailed mechanism is as followed:
10% trigger limit: If this limit is breached before 1 pm, trade is halted for 45 minutes. If the same is breached between 1 pm to 2.30 pm, trade is halted for 15 minutes. After 2.30 pm, there is no halt in trading.
15% trigger limit: If this limit is breached before 1 pm, trade is halted for 1 hour 45 minutes. If the same is breached between 1 pm to 2.30 pm, trade is halted for 45 minutes. After 2.30 pm, trade is halted for the remainder of the day.
20% trigger limit: If this limit is breached any time during trading hours, trading is halted for the remainder of the day.
Few earlier instances of applications of circuit breaker
- Breaching lower circuit limit:
- The first time the trading was stopped because of circuit breakers was on May 17, 2004 when trading had to be halted twice in the day.
- Subsequently, trading was halted because of circuit breakers on May 22, 2006, October 17, 2007 and January 22, 2008.
- Breaching upper circuit limit:
- In 2009 for the first time in Indian market’s history, trading was halted for the day due to markets hitting upper circuit limits.
- It was after UPA coalition’s decisive electoral win in the 15th Lok Sabha elections.