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What are Price Bands and Circuit Breakers?

The NSE and BSE have set price bands for all securities. The price bands serve as boundaries for the stock's trading; the exchange will not accept orders that are set outside the minimum and the maximum of the price range.

The purpose behind price bands and circuit breakers is to control mass buying or selling of shares and send a market spiralling into one direction, and perhaps most importantly, to curb panic selling.

Most stocks on the NSE and the BSE have an upper and lower price band. There are 5 categories of price bands:

  • If a stock has derivative products listed or if the stock is included on an index on which derivative products are available, it does not have an upper or lower price band
  • A stock can have price bands of 20% either way, based on the previous day's closing price.
  • A stock can have price bands at 10% either way, based on the previous day's closing price.
  • A stock can have price bands at 5% either way, based on the previous day's closing price.
  • A stock can have price bands at 2% either way, based on the previous day's closing price.
Similarly, a marked wide "price band" is implemented through the circuit breaker system. On the BSE, the Sensex is used while on the NSE, the Nifty. Whenever either triggers a circuit breaker, a coordinated trading halt is applied to all equity and derivative markets nationwide. The system is applied at 3 stages of index movement: at 10%, 15% and 20%.There scenarios can therefore come about:

  • If a 10% movement occurs on either index, a one hour market halt occurs if the movement takes place before 1:00pm. If the movement occurs at or after 1:00pm and before 2:30pm, trading is halted for 30 minutes. If the movement occurs at or after 2:30, no trading halt is imposed.
  • If a 15% movement occurs on either index, a two hour market halt occurs if the movement takes place before 1:00pm. If the movement occurs at or after 1:00pm and before 2:00pm, trading is halted for one hour. If the movement occurs at or after 2:00, trading is halted for the remaining of the day.
  • If a 20% movement occurs on either index, trading is halted for the remaining of the day.

 

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