The Hindu Business Line : How circuit breakers cut trading in stock markets

AN electrical circuit breaker is a safety mechanism that cuts power whenever a building's electrical wiring has too much of it flowing through. The stock market's circuit breaker works on the same principle: cut trading when the system is overloaded.

Currently, the BSE Sensex and NSE S&P CNX Nifty are the indices used as reference points to trigger the circuit breaker. During the day, if either index moves beyond prescribed limits, there is a countrywide halt in trading in equity and its derivatives markets.

At present, the circuit breaker's prescribed limits are 10 per cent, 15 per cent and 20 per cent, which also decide the duration of the stop. The percentages are calculated on the closing index value of a quarter and remain in place for the next three months.

For example, the Sensex closed at 5,590.60 points on March 31. Therefore, until end June, the circuit breaker would be triggered when the Sensex swings by at least 550 points in a day.

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