Most Adani stocks hit lower circuits again: What is a circuit breaker in the stock market?

What are circuit breakers?

In June 2001, the Securities and Exchange Board of India (SEBI) implemented index-based market-wide circuit breakers.

Circuit breakers are triggered to prevent markets from crashing due to a panic induced sale of stocks. This can happen due to many reasons which lead to stockholders in the market feeling that their stocks are overvalued. Thus they enter into a sell-off.

Circuit breakers temporarily halt trading and thus stop the sell-off. Effectively, circuit-breakers cap how much the value of a stock can fall in a single day/trading session and in doing so, create a more stable market overall.

How do these work?

This index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent. When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.

For instance, if the S&P BSE Sensex were to fall more than 10 per cent before 1 pm on a given day, circuit breakers would be triggered for a period of 45 minutes; in case it fell more than 15 per cent on or after 2 pm, circuit breakers would be triggered for the remainder of the day and in case it fell more than 20 per cent at any time of the day, the trading would be halted for the remainder of the day.

The extent of duration of the market halt and pre-open session is as given in the table below:

(Source: NSE India website)

The Stock Exchange computes the Index circuit breaker limits on a daily basis based on the previous day’s closing level of the index rounded off to the nearest tick size.