Circuit breakers

Circuit breaker is an emergency regulatory measure that temporarily halts trading of a security or an index for a certain period on an exchange. They function automatically when prices hit a predefined level. Circuit breakers are triggered when a security experiences a large percentage swing in either direction or a market index experiences a catastrophic decline. In shot, these are are used to prevent excessive speculative gains or losses on a security or devastating losses in the markets.

In the US, they are issued for individual securities and broad market indexes like S&P 500. US regulations have three levels of circuit breakers to halt trading when S&P 500 drops 7 percent, 13 percent, and 20 percent. In India, it is applied at the three stages that are 10 percent, 15 percent and 20 percent.The first market-wide circuit breakers were introduced in the U.S. after Black Monday in 1987, when the Dow Jones Industrial Average (DJIA) declined by 22% in one day.

Level 1 & 2 circuit breakers halt trading on every exchange for 15-minutes. But, level 3 halts the trading for rest of the day. But, if the circuit breaker is triggered at 3:25 pm of the trading day, trading is allowed to continue. In India the trading time is 9:30 am 3:30 pm. They are also called as market-wide circuit breakers.

The Indian stock exchange has implemented index-based market-wide circuit breakers with effect from July 2, 2001 based on SEBI Circular No. SMDRPD/Policy/Cir-37/2001 dated June 28, 2001. SEBI vide its Circular no. CIR/MRD/DP/ 25 /2013 dated September 03, 2013 has partially modified the earlier circular. The revised guidelines are as below.

The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached earlier. In this regard the Exchange has issued a circular no 85/2013 (Download No-24709) dated October 11, 2013.