How does Sensex, Nifty circuit breaker works - read here

Image courtesy: Reuters

A Circuit Breaker in stock markets is of two types, 'upper circuit' and 'lower circuit'. The 'upper circuit' is a maximum range in which a stock can move on a daily basis whereas the 'lower circuit' is a minimum range in which a stock can move on a daily basis.

A Circuit Breaker aims to bring normalcy in the stock markets at a time when the index moves beyond reasonable limits. The trading in the entire market gets suspended for a period of time when the index hits the circuit breaker.

As per the National Stock Exchange (NSE), the index based market-wide circuit breaker system comes into play at three stages of the index movement, at 10 percent, at 15 percent, and at 20 percent. 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 the movement of either the BSE Sensex or the Nifty50, whichever is breached earlier.

According to the Sebi rules, if the index (Sensex or Nifty) moves 10 percent in either way before 1 PM, trading across-the-board stops for 45 minutes. If the limit is breached between 1 pm and 2:30 pm, the halt duration will be 15 minutes while after 2:30 pm, there won't be any halt. After the circuit is breached, trading is halted accordingly. 

The market re-opens after an 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.

That's why the stock markets on Friday morning (March 13, 2020) halted for 45 minutes as Nifty hit 10 percent 'lower circuit'.

The stock markets opened the red for the second consecutive day on Friday. After early trade, the BSE Sensex tanked below 3000 points at 29,687.52 down by almost 9.43% while Nifty opened at 8,624.05 down by 966.10 points at almost 10% at 9.40 am on Friday morning dragged by the global sell-off on the rising worries amid COVID-19 outbreak. The markets resumed trading at 10:20 am. 

The Indian stock exchanges have been implementing index-based market-wide circuit breakers since July 2, 2001, based on the Securities and Exchange Board of India (SEBI) guidelines.