A circuit filter is a price limit a stock exchange imposes on a stock to control extreme price movements within a trading session. It sets the maximum percentage a stock can rise or fall from its reference price during the day.
When a stock reaches its upper or lower circuit, trading in that stock may be restricted or temporarily halted, depending on the applicable exchange rules and security.
Keep reading to learn more about how circuit filters work and their role in stock trading.
Key Takeaways
- Circuit filters limit sharp price movements in stocks and market indices.
- SEBI regulates the framework, while stock exchanges implement the applicable rules.
- Market-wide circuit breakers apply at 10%, 15%, and 20% index movements.
- Individual securities can have fixed price bands or dynamic price ranges.
- Circuit filters can affect trading, pending orders, and price movements after reopening.
Understanding Circuit Filters in Stock Trading
A circuit filter, also known as a circuit breaker, is a percentage-based mechanism that prevents extreme price movements in the stock market. When a stock's price or a market index rises or falls sharply and reaches a prescribed limit, the circuit filter comes into effect, and trading may be restricted or temporarily halted.
In India, the Securities and Exchange Board of India (SEBI) governs circuit filter rules, and stock exchanges implement them. This mechanism helps to control extreme volatility and prevent panic-driven buying or selling when the market moves significantly in either direction.
Types of Circuit Filters
Circuit filters are mainly classified based on whether they apply to the overall market or an individual stock.
Market-Wide Index Circuit Breakers
These apply to the Nifty 50 and BSE Sensex. If either index moves sharply and reaches a prescribed level, trading across the equity and equity derivatives markets may be halted. The three trigger levels are:
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10% Level |
Trading is halted for a specified period, depending on the time at which the limit is breached. |
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15% Level |
A longer trading halt applies if the limit is breached before the specified time. |
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20% Level |
Trading is halted for the remainder of the trading day. |
The duration of the halt at the 10% and 15% levels depends on the time of the breach, while a 20% movement results in a market-wide halt for the rest of the day.
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Scrip-Wise Price Bands
These apply to individual stocks or securities. A price band sets the maximum and minimum price range within which a security can trade during a trading session.
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This is the upper price limit. A stock hits the upper circuit when its price reaches the maximum permitted level. |
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Lower Circuit |
This is the lower price limit. A stock hits the lower circuit when its price falls to the minimum permitted level. |
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Percentage Bands |
Depending on the security, fixed price bands may be set at 2%, 5%, 10% or 20%. |
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Dynamic Price Range |
Stocks with active derivative contracts do not have fixed price bands and instead follow a dynamic price range. |
These price bands help to restrict trading beyond the prescribed range for securities covered under the mechanism.
Why is Circuit Filter Important for the Stock Market?
Circuit filters are important because sharp price movements can create uncertainty and disorderly trading. They limit such movements, giving market participants time to assess the situation before trading resumes.
The key reasons include:
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Controls Extreme Price Movements: Circuit filters restrict transactions beyond the prescribed price limits, which prevents unusually sharp movements in stock prices.
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Provides Time to React: A trading halt provides investors time to assess the information behind a sharp market movement and reconsider their trading decisions before the market reopens.
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Helps Maintain Orderly Trading: SEBI and stock exchanges use circuit breakers as part of their risk management and market surveillance framework to support the orderly functioning of the securities market.
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Applies Across the Market: When a market-wide circuit breaker is triggered, trading is halted in equity and equity derivatives markets nationwide. This creates a coordinated response to exceptional market movements.
Circuit Filter Rules for Market Indices
The trading halt depends on both the level breached and the time it occurs. The circuit filter rules for market indices are stated in the table below:
| Trigger Threshold Limit | Trigger Time | Market Halt Duration | Pre-Open Call Auction Period (Post Market Halt) |
| 10% | Before 1:00 PM | 45 minutes | 15 minutes |
| At or after 1:00 PM but before 2:30 PM | 15 minutes | 15 minutes | |
| At or after 2:30 PM | No trading halt | Not applicable | |
| 15% | Before 1:00 PM | 1 hour 45 minutes | 15 minutes |
| At or after 1:00 PM but before 2:00 PM | 45 minutes | 15 minutes | |
| On or after 2:00 PM | Halted for the rest of the day | Not applicable | |
| 20% | Any time during trading hours | Halted for the rest of the day | Not applicable |
Implications of Circuit Filters on Stock Trades
When a circuit filter is triggered, it immediately affects how trading takes place. Here is how it can affect stock trades:
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Trading Stops During the Halt: Once a market-wide circuit breaker is triggered, normal trading stops for the specified period. Investors cannot execute buy or sell trades until trading resumes.
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Impact on Pending Orders: When a market-wide circuit breaker is triggered, order matching stops during the trading halt. How pending or unmatched orders are treated depends on the exchange and the trading session involved.
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Post-Halt Price Movements: Once trading resumes, new buy and sell orders can drive price movements based on market conditions and investor demand.
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Post-Halt Pre-Open Session: After certain market-wide trading halts, trading resumes through a pre-open call auction session before normal trading begins again.
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Buying and Selling Restrictions: When a stock hits its upper or lower price band, trades cannot take place outside the permitted price range. In some situations, a lack of matching buyers or sellers can also make it difficult to exit a position.
Real-Life Examples of Circuit Filters in India
Circuit filters have been triggered during some of the most dramatic trading sessions in Indian market history.
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The 2009 Market Surge
On May 18, 2009, the Indian stock market rose significantly after the Lok Sabha election results. Within seconds of opening, the Nifty and Sensex crossed the 15% circuit-breaker level, and trading was halted for 2 hours. After the market halt, both indices further crossed the 20% level. As a result, trading was suspended for the remainder of the trading session.
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The COVID-19 Market Crash in 2020
The situation was very different in March 2020. Fear over the COVID-19 pandemic triggered heavy selling across the market during the stock market crash. On 13 March, the 10% market-wide circuit breaker came into effect, and trading stopped for 45 minutes before the market reopened.
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Jio Financial Services Lower Circuit in 2023
In a stock-specific example, Jio Financial Services hit its 5% lower circuit on 23 August 2023 after falling 5% for the third consecutive trading session. The stock could not fall below the prescribed price limit, although trading could continue at that price if matching buyers and sellers were available.
Conclusion
Circuit filters play an important role in maintaining orderly trading when stock prices move sharply in a short period. They do not prevent a stock from rising or falling, but temporarily restrict extreme price movements within the limits set by the stock exchange. This can give investors and market participants time to assess new information and make more informed decisions instead of reacting purely to panic, speculation, or sudden market sentiment.
