A circuit breaker is a safety mechanism used by stock exchanges to temporarily halt trading if there is a sudden and steep fall in the stock market.
These measures are put in place to prevent panic selling, control excessive volatility, and maintain orderly trading conditions.
By pausing trading for a short period, circuit breakers give investors time to understand the situation, make informed decisions, and avoid emotionally driven actions.
How Do Circuit Breakers Work?
Circuit breakers are triggered when a major market index, such as the Nifty 50 or Sensex, falls sharply by a set percentage within a single trading day.
Here’s how the process works:
1. Triggering Event: If the index drops by a specific percentage from the previous day's closing value, the circuit breaker gets activated.
2. Temporary Halt: Once triggered, trading is paused across the stock market for a defined time period. This gives investors a cooling-off period to reassess the situation calmly.
3. Market Stabilization: If the fall is more severe, additional levels of circuit breakers may be triggered, with longer halts or even early market closure in extreme cases.
Why Are Circuit Breakers Important?
- They help prevent panic-driven selling and protect investors from extreme losses.
- Give time to digest news or events that may have caused the sudden drop.
- Help maintain stability in the market and protect the interests of all participants.
- Promote fair and orderly trading by giving investors time to react rationally.
When Were Circuit Breakers Introduced?
Circuit breakers were introduced after the 1987 global stock market crash, also known as Black Monday, when markets across the world crashed suddenly.
Regulators created this system to reduce the chances of such panic-driven crashes happening again.
In India, circuit breakers are enforced by SEBI and implemented by stock exchanges like NSE and BSE.
Different Levels of Circuit Breakers in India
Circuit breakers in India are classified into three levels, based on how much the index falls in a single day:
Level 1 – 7% Decline
Trading halts for 15 minutes if the fall happens before 3:25 PM.
If after 3:25 PM, no halt is applied and markets continue trading.
Level 2 – 13% Decline
Trading halts for 15 minutes if it occurs before 3:25 PM.
After 3:25 PM, markets may continue depending on the situation.
Level 3 – 20% Decline
Triggers a full-day trading halt, and the market is closed for the rest of the day.
These levels are calculated using the closing value of the index from the previous trading day.
Circuit breakers help control panic during market crashes by pausing trading temporarily. They protect investors from sharp market moves and give time to make calm, well-informed decisions. In India, SEBI and stock exchanges actively monitor and enforce circuit breaker rules to maintain market stability.