Upper And Lower Circuit: How SEBI's Circuit Breakers Act As Safeguard Against Market Volatility | Explained

The upper and lower circuits were introduced by the SEBI in India in 2001. Circuit breakers are designed to intervene in situations of excessive volatility in the stock market

In an effort to protect investors from extreme market fluctuations, the Securities and Exchange Board of India (SEBI) has implemented circuit breakers, automated mechanisms that temporarily halt trading during periods of rapid price changes. The upper and lower circuits were introduced in India in 2001. These measures aim to curb panic selling or buying, ensuring market stability and fair trading conditions.

Understanding Circuit Breakers

Circuit breakers are designed to intervene in situations of excessive volatility in the stock market. They come in two main types:

Market-wide circuit breakers: Triggered at three stages of index movement - 10 per cent, 15 per cent, and 20 per cent - these are activated by either the BSE Sensex or the Nifty 50, whichever occurs first.

Single-stock circuit breakers: Activated by significant movements in individual stocks, these halt trading in specific stocks to prevent manipulation or extreme price swings.

Upper and Lower Circuits

Upper Circuit: This is the maximum price rise permitted for a stock or index during a trading session. Once reached, trading halts temporarily, indicating high demand and positive market sentiment.

Lower Circuit: Conversely, the lower circuit represents the maximum percentage decline permitted for a stock or index. When reached, trading stops temporarily, signaling negative market sentiment and excessive selling pressure.

Role of Circuit Filters

Circuit filters, also known as price limits, work alongside circuit breakers to manage price volatility. They set upper and lower price limits on stocks or indices, halting trading when breached to allow investors time to reassess their positions.

Regulations and Advantages

The SEBI oversees circuit breaker rules, ensuring fairness and transparency. While circuit breakers prevent market crashes and promote stability, some traders criticise them for disrupting trading. Nonetheless, they provide a vital mechanism for stabilising markets and protecting investors.

Impact on Algorithmic Trading

Circuit breakers can also influence algorithmic trading strategies, with rules in place to prevent exploitation of market pauses by automated systems.

Understanding Market Volatility

Market volatility, the degree of price variation over time, is managed by circuit breakers. While they offer a cooling-off period for traders, critics argue they can be restrictive.

The SEBI's circuit breakers represent a crucial safeguard in India's financial markets, balancing the need for stability with fair trading practices. As markets continue to evolve, these mechanisms remain essential for investor confidence and market integrity.