Trading in Circuit Limits

The major stock and commodities exchanges have instituted procedures to limit mass or panic selling in times of serious market declines and volatility. These mechanisms are known as Circuit Breakers, the Collar Rule, and Price Limits. Circuit Breakers establish whether trading will be halted temporarily or stopped entirely. The collar Rule and Price Limits affect the way trading in the securities and futures markets takes place. Circuit Limits may change everyday and stock keeps moving from one circuit breaker category to another, based on previous day’s closing price. The intention of introducing the circuit breaker was to reduce excessive speculation by stopping order flow and help improve market liquidity. The concept of circuit breaker was laid back to 1987 crash of US markets. This crash left the surveillance system of US exchanges to introduce the concept of circuit breakers. In India, both NSE and BSE introduced the concept of circuit breaker.  NSE has introduced it post 2000. Circuit breaker system applies to both stocks and market as a whole. Both NSE and BSE have applied the stock wise circuit limit system at four levels i.e. 2%, 5%, 10% and 20%. The upper and lower price limits are set by the exchange from time to time as a price containment measure beyond which trading will not be allowed till the prices are normal or limits reset. This is not applicable for stocks that are part of Derivatives segment or are a part of the index, which is traded in Derivative segment.