Price-bands and circuit-breakers in trading

Price band refers to the range within which a stock can move in a trading session. On the other hand, Circuit breakers are basically price bands for indices. When breached, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.

The stock exchanges around the world have devised several rules and mechanisms to ensure fair trading practices while maintaining market stability. It is to achieve this objective that bourses use tools like price-bands and circuit-breakers.

Price-bands and circuit-breakers broadly refer to a range within which the price of a financial security can fluctuate.

While price-bands are set for stock prices, circuit breakers are used for indices. Setting such limits prevent extreme price fluctuations, or panic selling and buying on any given day.

The upper and lower limits of these bands are set by exchanges based on the guidelines laid out by the capital market regulator and can be adjusted based on market conditions.

As an investor, you should be well-informed about these concepts in order to safeguard your position in times of extreme market volatility. Let us help you understand in detail how price-bands and circuit breakers work in the Indian stock markets.

Price bands

Price band refers to the range within which a stock can move in a trading session. For instance, a 10% price band for a stock that closed at ₹100 in the previous session implies that it can move anywhere between ₹90 and ₹110 in the ongoing session. 

Trades executed outside this price band would not be allowed and considered invalid. The buying and selling activities would be suspended as soon as the stock hits the upper or lower end of this price range.

Taking the above example, if the stock hits its lower limit of ₹90 during the trading session, it would be “locked” in a lower circuit. This means that no more sell orders can be placed on the counter and the share price can’t go lower than this level. However, the price may increase again to move within the range in case traders start buying the stock.

Stocks can have different daily price bands as listed below:

• Daily price bands of 2% (either way)
• Daily price bands of 5% (either way)
• Daily price bands of 10% (either way)
• No price bands are applicable on scrips on which derivative products are available
• Price bands of 20% (either way) on all remaining scrips (including debentures, preference shares etc.)
• Stocks on which no derivatives products are available but which are part of index derivatives are also subjected to price bands

The price bands can be changed for a stock from time to time. The downward revision is a daily process, whereas upward revision is a bi-monthly process, subject to satisfaction of certain objective criteria.

Circuit breakers

Circuit breakers are basically price bands for indices. When breached, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.

The index-based circuit breaker system applies at three stages of the index movement either way -- at 10%, 15% and 20% compared with its previous close.

These circuit breakers can be triggered by movement of either the BSE Sensex or the Nifty 50, whichever is breached earlier.

The purpose of the halt is to give traders time to evaluate market movement and determine the future course of action. This lends stability to the system and protects investor interest. After every halt, the market reopens with a pre-opening session.

The duration of the market halt varies depending on the quantum and timing of the movement of the index (check the table below). 

To conclude

It can be said that price-bands and circuit breakers act as protection gear for investors in special circumstances when sentiments overrule logic and markets spiral towards one direction.