Circuit breakers were introduced by the Securities and Exchange Board of India (SEBI) in 2001 as a measure to prevent market crashes caused by panic selling. These circuit breakers temporarily halt trading during unstable market conditions, thereby preventing sharp declines in stock values and stabilizing the market.
What are Circuit Breakers?
Circuit breakers are triggers put in place to prevent markets from crashing due to a panic-induced sale of stocks. The SEBI circuit breaker system operates at three levels: 10%, 15%, and 20% of the index movement. When triggered, trading halts in all equity and equity derivative markets nationwide for a specified period.
How do Circuit Breakers Work?
The index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent. When triggered, the circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide. For instance, if the S&P BSE Sensex were to fall more than 10 per cent before 1 pm on a given day, circuit breakers would be triggered for a period of 45 minutes. If the fall were more than 15 per cent on or after 2 pm, the circuit breakers would be triggered for the remainder of the day. In case it fell more than 20 per cent at any time of the day, the trading would be halted for the remainder of the day.
Effectiveness of Circuit Breakers:
The extent of the market halt and pre-open session is defined by the table below. The stock exchange computes the index circuit breaker limits on a daily basis based on the previous day’s closing level of the index rounded off to the nearest tick size. Circuit breakers effectively cap the amount by which the value of a stock can fall in a single day or trading session, creating a more stable market overall.
Recent Developments:
Recently, Adani Group stocks plummeted, with multiple hitting the lower circuit breakers, triggered by a Hindenburg Research report that accused the Adani Group of committing fraud and stock manipulation over many decades. The Adani Group called off its Rs 20,000 crore follow-on public offer (FPO), with Gautam Adani saying that the move was made to “insulate investors from potential losses”.
Circuit breakers serve as a safeguard against market crashes and provide stability to the market by temporarily halting trading during unstable conditions. By capping the amount by which the value of a stock can fall in a single day or trading session, circuit breakers create a more stable market overall. With the recent developments surrounding the Adani Group, the effectiveness of circuit breakers can be seen in preventing potential losses for investors.