The Hindu Business Line : Do circuit filters calm down passions?

The system is in vogue both in the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), which between themselves account for practically the entire stock market volumes in the country.

Cooling exercise

The concept of circuit filter in the context of stock markets is simple — cooling down passions.

If Sensex or Nifty, for example, moves up or down beyond the specified limits in terms of percentage, trading comes to a halt for the specified duration. Ditto for individual scrips.

Ironically, individual circuit filters do not halt trading in shares forming part of the indices — Sensex as well as Nifty. Perhaps, SEBI wants the bellwether shares to be freely traded untrammelled by circuit breakers. One doesn’t know why the same logic should not apply to lesser scrips.

In any case, circuit breakers have not been successful in arresting either the precipitous slides or the irrational exuberance manifesting in stock market indices scaling new highs every successive day when sentiments are high on the back of good fundamentals or sentiments.

Circuit breakers prevent short-circuits and the resultant fire. Speed breakers too prevent mishaps on roads through driving at breakneck speeds.

But circuit filters in stock markets have been successful in holding back neither the charging bulls nor the rampaging bears who resume after a few hours’ breather with vengeance. In the event, the object of circuit filters — to allow rational thinking to filter in — has largely remained unfulfilled.

Questionable concept

At any rate, the very concept of circuit filters is questionable given the fact that unlike circuit breakers and speed breakers, which are indeed necessary to ensure safety of people in buildings and on roads respectively, there is no need to baby-walk investors — especially the big-tickets ones who incidentally account for the lion’s share of the volumes — through the stock market minefields.

The players in the stock market should, in other words, be allowed to stew in their own juice not out of contempt for them but in realisation of the futility of the inane exercise of halting trading for the nonce. Seldom has the market changed course after the momentary halt.

The markets now have large number of players, including the formidable FIIs, with their legendary research skills.

They should therefore be allowed to find their own levels. To be sure, the circuit filter mechanism is not meant to protect the small investor. At best it may help day traders to an extent. This in itself is no justification for bring trading in a given scrip or the market itself to halt.

(The author is a Delhi-based chartered accountant.)

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