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What is a Circuit Filter and how it works?

IndianMoney.com Research Team | Posted On Monday, March 16,2020, 03:39 PM

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What is a Circuit Filter and how it works?

 

 

What is a Circuit Filter and how it works?

The share market is facing unprecedented times. The US is close to a shutdown due to the spread of the coronavirus. Italy is in lockdown while France and Spain have imposed sweeping emergency restrictions.  The coronavirus has claimed more than 1800 lives in Italy and close to 200 in Spain. China, Iran and UK have lost citizens to the killer virus.

Back home India has topped 100 cases with a couple of deaths. Mumbai, Pune, Bengaluru and several other cities have closed Malls, Schools and wedding halls. All this had an impact on the economy across the World and India as the BSE and NSE crash by 1000 points almost each day. Something unique happened to the stock markets on March 13th and market trading was halted for 45 minutes as Nifty hit the circuit filter. What is this circuit filter?

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See Also: Stock Market: Sell Winners or Hold on to Losers

What is a Circuit Filter and how it works?

Trading was halted on March 13th for an hour after the Nifty Index plunged 10% to 8625 points. On Friday morning at 9:20 AM Nifty hit the 10% circuit filter. Trading was halted for 45 minutes followed by a preopen session of 15 minutes. The markets came back to action at 10:20 AM. Trading on BSE Sensex too was halted as the Nifty hit the circuit filter.

What is a circuit filter?

Sometimes share prices tend to move rapidly in any direction (Up and Down). This type of movement can induce panic in the stock markets. This is where a circuit filter helps.

The circuit filter ensures that swift market movement either Up or Down happens due to logic and not panic. The circuit filter is a price band levied by SEBI to curb excessive stock price movement. This prevents manipulation by stock operators. Once the circuit filter is applied, no further Buy/Sell orders can be placed. You can only modify or cancel the existing orders.

The stock exchange BSE and NSE place price bands with upper and lower circuits. The stock prices cannot move beyond these limits in a day.

When is circuit breaker used?

This is used at three stages of index movement. This is 10%, 15% and 20% either way. The stock market wide circuit breakers get triggered when Nifty 50 or BSE Sensex gets breached; whichever comes first.

How long is stock trading halted?

The halt in stock trading depends on quantum/amount of fall and time of breach and could be 15 minutes to a day.

A 10% trigger limit: If the 10% limit is breached before 1 PM, the stock market trade is halted for 45 minutes. If the 10% limit is breached between 1 PM to 2:30 PM stock market trade is halted for 15 minutes. There is no halt for trading after 2:30 PM.

A 15% trigger limit: If the 15% limit is breached before 1 PM, the stock market trade is halted for 1 hour 45 minutes. If the 15% limit is breached between 1 PM to 2:30 PM stock market trade is halted for 45 minutes. After 2:30 PM stock market trade is halted for the rest of the day.

A 20% trigger limit: If the 20% limit is breached anytime during trading hours, trading stops for the remainder of the day.

When the market reopens, there is a 15 minute pre-open call auction session of 15 minutes. The normal trading continues until the next circuit limit.

See Also: All You Need To Know : How Stock Markets Function?

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