What are the Stock Market Circuit Breakers: Meaning, Importance and Types
Learn how circuit breakers pause trading during extreme market swings to protect investors from panic-driven losses.
Team Sahi
Stock market circuit breakers are a temporary pause in stock market activities. Usually, a sharp price movement of an asset or in the entire market triggers it. The price movement may be upward or downward, and this breaker acts as a safety switch to prevent panic amongst traders or investors in the stock market.
A market-wide circuit breaker applies if the market moves at 10%, 15%, or 20% in either direction, and stock-specific breakers apply if their prices move between 2% and 20% up or down from their previous closes.
In this blog, discover how circuit breakers work in the stock market, how they differ and why they are required, and more.
What are the Stock Market Circuit Breakers?
Stock market circuit breakers in India are a safety mechanism that pauses trading when prices of market indices or stocks move too sharply, whether upwards or downwards. Such a pause aims to prevent stock market traders from buying irrationally or panic-selling. Otherwise, this can lead to extreme price swings in stocks.
Furthermore, circuit breakers in the stock market follow a predefined percentage based on their types and compare them with the previous closing prices of indices or stocks. If indices or stock prices move beyond or below the percentage level, the stock market pauses temporarily.
Due to such a pause, stock market investors, traders, stock exchanges (i.e., NSE and BSE), and regulators get time to assess such a rapidly developing situation and make decisions more rationally.
Why are Stock Market Circuit Breakers Required?
Trades and other activities in the Indian stock market are generally volatile and get easily influenced due to sentiments, news, global events, and even rumours.
For example, positive news or a rumour regarding a specific stock or the market as a whole may influence investors' or traders' judgment. As a result, they might end up buying aggressively, pushing prices up too fast. Conversely, negative news may create panic among traders or investors, and they might start selling, which cumulatively results in large-scale sell-offs.
The Securities and Exchange Board of India (SEBI) introduced this mechanism to prevent panic buying and selling that may lead to a market crash and even wipe out a large amount of investor wealth. Apart from giving a time for clarity, it helps limit how much a market may fall in a day, protecting investors who do not track the market minutely.
Different Types of Stock Market Circuit Breakers in India
Now that you know the stock market circuit breaker meaning, you must also note that there are 2 types of breakers in the Indian stock market. Here is a detailed breakdown:
Market-Wide Circuit Breakers
This type of circuit breaker applies when indices of Nifty (NSE) and Sensex (BSE) go beyond or below a certain percentage. These percentages are 10%, 15%, and 20%.
Here are the stock market circuit breaker rules for a market-wide pause based on time factors:
| Percentage | Time of Trigger (IST) | Market Pause | Pre-Open Call Auction After the Pause |
|---|---|---|---|
| 10% | Before 1 PM | 45 minutes | 15 minutes |
| 1 PM onwards till 2:30 PM | 15 minutes | 15 minutes | |
| At 2:30 PM and afterwards | No pause or halt | NA | |
| 15% | Before 1 PM | 1 hour and 45 minutes | 15 minutes |
| From 1 PM onwards to up to 2:30 PM | 45 minutes | 15 minutes | |
| At 2:30 PM or afterwards | For the remaining trading day | NA | |
| 20% | At any time during open market hours | For the rest of the trading day | NA |
Stock-Specific Circuit Breakers
As its name implies, unlike the market-wide breaker, such stock market circuit breakers work depending on the price movement of specific types of stocks. Setting a price band in the form of a percentage limits how much a stock type can move up or down in a single day.
Some movements compared to its previous closing are 2%, 5%, 10%, and 20%, whether upwards or downwards. Talking about the types, these percentage levels apply depending on how volatile a certain stock is.
For instance, a penny stock may have a lower circuit limit (as low as 2–5%), and a pause triggers if its price moves beyond or below this level compared to its earlier closing. For more stable stocks, the band may be higher, say at 10%, and a pause triggers if their price breaches this level compared to its earlier closing.
Previous Instances of Stock Market Circuit Breakers Applications
Understanding the safety mechanism of the stock market may become clear with some real-time examples:
Market Crash Due to COVID-19
On March 13, 2020, both the indices, i.e., the Nifty and Sensex, fell by over 10%. The stock market declined because of the panic created by the recession, and trading was paused for 45 minutes.
Election Result of 2004
An older reference is when the Indian stock market reacted sharply to the election results. The Sensex witnessed a steep fall, triggering both the 10% and 15% circuit breakers on a single trading day on May 17, 2004.
Importance of Stock Market Circuit Breakers for Investors
Prevents Selling Driven by Panic
With a pause, investors, traders, and stock markets get a buffer to analyse an unprecedented market condition. It helps prevent panic selling of stocks and other assets, which in turn prevents sharp falls in asset prices.
Defends Against Significant Losses
Stock market circuit breakers generally aim to prevent significant losses of investors' wealth, as they reduce price fluctuations. It is typically effective when the market is dealing with negative news, rumours, or sentiments.
Helps Maintain Stability
Suppressing extreme price swings helps maintain the overall market stability. As a result, it usually helps increase confidence amongst investors and traders. It motivates them to overcome fear and make informed decisions by strategically analysing the market.
Disadvantages of Stock Market Circuit Breakers Applications
Aside from its importance, there are some disadvantages that you must be aware of:
No Real-Time Price Data
When a circuit breaker is activated, investors cannot access real-time asset prices, as trading is temporarily halted and price movements are suspended. To some extent, it creates uncertainty about where the market may open once trading resumes.
Information Gap Between Investors
Early investors may benefit if they get the news before a circuit breaker triggers. Traders without this information in time may face losses when trading resumes after the pause.
Final Words
Stock market circuit breakers are a safety mechanism when market indices or stock prices move sharply, whether upwards or downwards. It aims to reduce panic selling or irrational buying that may destabilise the Indian financial market.