Securities market regulator, SEBI, on Tuesday said circuit breakers for benchmark indices, such as the BSE Sensex and CNX Nifty will henceforth be calculated on a daily basis. With volatility increasing in the stock markets, the move will help arrest big movements in the stock exchanges.
Cooling cushion
Currently, exchanges calculate the circuit limits — a maximum limit an index can move in a day — on a quarterly basis.
The BSE has currently fixed the circuit limit at 1,950 points for 10 per cent movement, 2,900 points for 15 per cent and 3,875 points for 20 per cent swing, based on the Sensex closing value on June 30. Thus, trading will get halted only if Sensex hits 16,290 or 20,190 in a single trading session.
However, according to the new calculation, trading would be halted if the Sensex touches either 16,415 or 20,065, as the BSE Sensex closed at around 18,240 on Tuesday.
This would provide a cooling period to the market participants and to assimilate and react to the market movements.
The new calculation, which will take effect from October 1, would apply for 10 per cent, 15 per cent and 20 per cent circuit limits.
While 10 per cent and 15 per cent limits result in temporary trading halts, a 20 per cent movement halts trading for the entire day.
Punching errors
Currently, exchanges impose a circuit filter ranging from 2-20 per cent for all scrips, except those on which derivative products are available and are part of indices on which derivative products are available. However, exchanges do impose a dummy circuit filter on those scrips as well to avoid punching errors.
The broking community has welcomed the move.
According to an official of a leading broking house, “This is the right way to calculate the circuit breaker, as it should be on a real-time basis. By doing this, SEBI has set right the anomaly that has been in the system so far.”
Earlier this April, the US markets too, shifted to calculating circuit filters for indices on a daily basis.