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Explained: What is circuit breaker in stock market?

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Outside the Bombay Stock Exchange building in Mumbai on Thursday. (Express Photo: Pradip Das)

On Thursday, the Bombay Stock Exchange (BSE) experienced the second biggest single-day fall in its history as it fell by 8.2 per cent, slightly lower than the 11 per cent fall it saw during the 2008 financial crisis. This fall began in January, when China started reporting a sharp increase in the number of COVID-19 cases. The Indian stocks recovered on Friday afternoon as the National Stock Exchange (NSE) Nifty 50 jumped by 3.98 per cent, while the S&P BSE Sensex jumped by 4.23 per cent.

Since the indexes plunged more than 10 per cent each day earlier, a circuit breaker was triggered for the first time since 2009 halting trading for 45 minutes. On Monday, the president of the New York Stock Exchange (NYSE) said that safeguards in the US stock market are working as planned, after a seven per cent drop in the S&P 500 led to a 15-minute halt in trading as circuit breakers were triggered.

These declines came amid the coronavirus outbreak, due to which several countries have shut their borders affecting airlines, tourism and the hospitality sectors and has led to a scare among market participants worldwide.

What are circuit breakers?

In June 2001, the Securities and Exchange Board of India (SEBI) implemented index-based market-wide circuit breakers. Circuit breakers are triggered to prevent markets from crashing, which happens when market participants start to panic induced by fears that their stocks are overvalued and decide to sell their stocks.

This index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent. When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide. For instance, if the S&P BSE Sensex were to fall more than 10 per cent before 1 pm on a given day, circuit breakers would be triggered for a period of 45 minutes; in case it fell more than 15 per cent on or after 2 pm, circuit breakers would be triggered for the remainder of the day and in case it fell more than 20 per cent at any time of the day, the trading would be halted for the remainder of the day.