Explained: What is circuit breaker and what happens when a stock hits upper or lower circuit?
With several of the Adani group stocks plummeting and hitting the lower circuit on the National Stock Exchange (NSE) for two days in a row, there’s a lot of buzz around what circuit breakers are and what they do.
An unusual dip or spike in a stock generates concerns amidst traders. On June 15, shares of three of Adani Group's six publicly traded companies - Adani Transmission, Adani Total Gas, and Adani Power Limited - hit their lower circuit limits. This follows similar lows a day before, when Adani Green, Adani Transmission, and Adani Gas all fell 5 percent to hit the lower circuit. Adani Enterprises slumped 20 percent.
Here are some frequently asked questions about what is a circuit breaker and how does it work:
What is a circuit breaker?
A circuit breaker refers to a price band - it includes a lower limit called a lower circuit and an upper limit called an upper circuit, at which the stock can be traded in the market on a given trading day.
Why is a circuit breaker needed?
Since stock prices are mostly sentiment-driven, they fluctuate due to positive and negative news. A circuit filter is set up to ensure that there is no extreme price movement and investors are protected from any unwanted surprises. The filters also help curb price manipulation by stock operators to a certain extent.
Who decides the circuit limits for Indian stock markets?
In India, the circuit limits are set by the Securities and Exchanges Board of India (SEBI). Indian stock exchanges implemented index-based market-wide circuit breakers with effect from July 2, 2001. Some modifications were also made in September 2013.
When does an index hit the upper or lower circuit?
The circuit breaker system applies at three stages of the index movement. If an index jumps or falls 10 percent, 15 percent, or 20 percent, the circuit breaker is triggered, followed by a coordinated trading halt in all equity and equity derivative markets nationwide.
What happens after a circuit breaker is triggered?
The trading then resumes after a period of time depending on the rise or fall when it was halted. The markets then re-open with a pre-open call auction session of 15 minutes post the duration of the halt.
What’s the duration of the halt?
When an index falls or rises 10 percent before 1 pm, trading is halted for 45 minutes. If there’s 10 percent movement between 1 pm and 2:30 pm, there is a trading halt of 15 mins and no halt in case it happens after 2:30 pm.
If there’s a movement of 15 percent before 1 pm, trading is halted for one hour 45 minutes. In case of a rise or fall between 1 pm and 2:30, it is halted for 45 minutes. When there’s 15 percent movement after 2:30 pm, trading is halted for the remainder of the day.
Unlike the first and second stages, if a benchmark index witnesses a 20 percent movement at any time of the day, trading is halted for the remainder of the day.
What happens when a stock hits the upper circuit or lower circuit?
The highest price a stock can reach on a particular day is the upper circuit limit. When this limit is touched, there will be only buyers and no sellers. Likewise, the lowest price that a stock can hit is the lower circuit limit and when a stock hits this limit, there will be only sellers and no buyers.