Yesterday, on 13th March 2020, trading was halted on Indian stock exchanges as the markets plunged drastically due to COVID-19 fears.
- NSE Nifty50 dropped by 10.07% (966 pts) and halted at 8,624
- BSE Sensex dropped by 9.43% (3,040 pts) and halted at 29,687
It was absolute panic in the stock markets and it felt like the world is coming to an end.
If trading was not halted, the market would have dropped even further as more and more people started panic selling thereby creating an uncontrollable downward spiral.
What are circuit breakers?
A circuit breaker is an automatic mechanism to stop any drastic fall or a massive surge in a stock or an index during trading hours. It is used to keep the volatile swings in check.
The circuit levels are determined by the stock exchanges so as to protect investors and brokers from an unwanted surprise moment.
In case of a sudden swing investors tend to lose a massive chunk of their capital. Even traders may have to face margin calls from their brokers in case market plunges or surges too much.
When are circuit breakers applied?
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.
The market shall re-open, after index based market-wide circuit filter breach, with a pre-open call auction session. The extent of duration of the market halt and pre-open session is as given below:
| Trigger limit | Trigger time | Market halt duration | Pre-open call auction session post market halt |
|---|---|---|---|
| 10% | Before 1:00 pm. | 45 Minutes | 15 Minutes |
| At or after 1:00 pm upto 2.30 pm | 15 Minutes | 15 Minutes | |
| At or after 2.30 pm | No halt | Not applicable | |
| 15% | Before 1 pm | 1 hour 45 minutes | 15 Minutes |
| At or after 1:00 pm before 2:00 pm | 45 Minutes | 15 Minutes | |
| On or after 2:00 pm | Remainder of the day | Not applicable | |
| 20% | Any time during market hours | Remainder of the day | Not applicable |
Exchange shall compute the Index circuit breaker limits for 10%, 15% and 20% levels on a daily basis based on the previous day’s closing level of the index rounded off to the nearest tick size.
How long is trading halted for?
It depends on the time of the breach and the quantum of fall. 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.
What happens after trading resumes?
After the circuit is breached, trading is halted as mentioned above. The market re-opens, after index based market-wide circuit filter breach, with a pre-open call auction session of 15 minutes post the duration of halt.
The normal trading could begin and continue as long as the next circuit limit does not activate.