Circuit breakers and price bands

In simple terms

Exchanges use two kinds of brakes to slow down very sharp price moves.

• A price band limits how far one share's price can move in a single day, measured from the previous day's close. When a share reaches the edge of its band, people say it has hit its upper circuit or lower circuit.
• A market-wide circuit breaker stops trading in all shares and equity derivatives across the country for a while when a major index, the Nifty 50 or the Sensex, moves by a large amount in one day.

Both are pauses, not cures. They give people time to think and to absorb news, but they do not decide where prices go next.

Price bands on individual shares

For each share, the exchange sets a daily price band: a percentage either way from the previous close, beyond which the share cannot trade that day. The exchange chooses the band for each share and changes it when the share's trading changes, for example narrowing it for a share with unusual price moves. Shares on which futures and options trade are usually handled differently, with flexible limits instead of a fixed daily band.

When a share is locked at its lower circuit, the order book is lopsided: a long list of sellers and few or no buyers. Holders who want to get out may not be able to, sometimes for several days in a row. A stop-loss order cannot help in that situation, because there is nobody to sell to.

Upper circuits work the other way round: lots of buyers, almost no sellers. A small, little-known share that hits its upper circuit day after day without real news is a classic pattern in pump-and-dump schemes, where the rising price itself is the advertisement.

Market-wide circuit breakers

Market-wide circuit breakers are triggered when a major index, the Nifty 50 or the BSE Sensex, moves by large set percentages in a single day. They halt trading in all shares and equity derivatives across the country. There are several levels: the bigger the move, the longer the halt, and a very large move, or a large move late in the day, can close the market for the rest of the session. The exchanges work out the trigger levels each day from the previous day's close and publish the exact levels and halt times.

After a halt, trading restarts with a pre-open call auction, the same kind of session used every morning, so that buy and sell orders can be collected and a fair opening price found.

Market-wide halts are rare, because a fall of that size in a broad index in a single day is a very large move. Price bands on individual shares, by contrast, are hit every day somewhere in the market.

What circuit breakers do and do not do

They do slow down panic. A forced pause gives investors and institutions time to read the news, check positions and correct mistaken orders, and it stops a crash from feeding on itself minute by minute.

They do not stop prices from falling. If the news really is bad, prices can fall further once trading reopens, or keep falling over the following days. And for holders of small, illiquid shares, a price band can turn a loss into a trap: the price is frozen at the limit and nobody will buy.

Why it matters

Price bands explain why you sometimes cannot sell a share at all, and why a "stop-loss" cannot always protect you. They also help you read market behaviour sensibly: a share at its upper circuit is not proof of good news, and a market-wide halt is a pause, not a floor under prices. Knowing the rules before a crisis lets you make decisions calmly when one happens.

Limitations

• The bands, halt times and trigger levels are set by the exchanges and SEBI and can change. Check the current rules on the exchange websites.
• Which band applies to a share, and whether it has derivatives, changes over time, so check the specific share rather than assuming.
• Circuit breakers measure moves within a single day. A market can fall far more than 20% over weeks without triggering any of them.

Common mistakes

• Treating an upper circuit as a buy signal. It shows there are more buyers than sellers today, not that the business is worth more.
• Assuming you can always sell. At the lower circuit, sellers can wait for days.
• Thinking a halt means the worst is over. Trading restarts, and prices can keep moving the same way.
• Confusing a share's band with a market-wide halt. One affects a single share; the other stops the whole market.

Try it yourself

1. Look up any share on the NSE website and find its current price band and previous close. Work out today's upper and lower limits.
2. Check the exchange's list of shares that hit their price bands today. Are they mostly large, well-known companies, or small ones?
3. Using yesterday's Nifty 50 close, work out the index levels at which today's 10%, 15% and 20% market-wide breakers would be triggered.