Understand what a circuit filter is in stock trading, how it works to limit price volatility, and its role in maintaining market stability.
A circuit filter is a regulatory tool used in stock trading to temporarily halt price movement in an index or stock when it reaches predefined price change thresholds. This helps manage extreme volatility and supports orderly market behavior.
A circuit filter—also known as a circuit breaker—is a market mechanism introduced by regulators like SEBI (Securities and Exchange Board of India) to pause trading when a stock or index rises or falls beyond a specific percentage in a trading session. This mechanism helps prevent panic selling or irrational spikes, giving investors time to process information calmly.
Circuit filters are primarily of two types:
Index-Wide Circuit Breakers:
Triggered at 10%, 15%, and 20% movement in benchmark indices (like Nifty 50 or Sensex).
Result in a market-wide halt for a set duration depending on the time of breach.
Stock-Level Circuit Filters:
Applied individually to listed stocks.
Common filter limits are 2%, 5%, 10%, 15%, and 20%, depending on a stock’s liquidity, volatility, and category.
These filters vary in rigidity based on the security being traded and prevailing market conditions.
Circuit filters are regulatory mechanisms implemented in the stock market to prevent excessive volatility and price manipulation. They set predefined percentage limits on price movements during a trading day, ensuring that individual stocks and market indices do not experience drastic price fluctuations within a short period.
Key Functions:
Preventing Extreme Volatility: By imposing upper and lower price limits, circuit filters help in curbing sudden and sharp price movements that could destabilize the market.
Protecting Investors: They provide a safeguard for investors, especially retail participants, against erratic market swings that could lead to significant financial losses.
Ensuring Market Integrity: Circuit filters help in maintaining fair and orderly trading by preventing market manipulation and speculative trading practices.
In India, the Securities and Exchange Board of India (SEBI) has established specific circuit limits for both individual stocks and market indices to maintain market stability and investor confidence.
These filters are applied and updated by stock exchanges in line with SEBI’s framework.
| Circuit Type | Trigger Level | Trading Halt Duration (approx.) | Timing Dependency |
|---|---|---|---|
| Index-Wide (10%) |
±10% from previous close |
45 min – 1 hour |
Depends on whether breach is before or after 1 PM |
| Index-Wide (15%) |
±15% |
Up to 1 hour 45 minutes |
Full-day halt possible if post 2 PM |
| Index-Wide (20%) |
±20% |
Remainder of the trading day |
Any time of breach triggers this |
| Stock-Leve |
2%, 5%, 10%, etc. |
Stock-specific halt or freeze in movement |
Typically resumes after rebalancing or pending orders |
Circuit filters play an important role in turbulent market phases to:
Control Volatility: Prevents irrational surges or crashes.
Enhance Investor Protection: Gives time to absorb news/events.
Support Market Integrity: Encourages rational price discovery.
Systemic Risk Management: Averts cascading effects of market panic.
Here’s how circuit filters differ at the index level versus individual stocks:
| Criteria | Index-Wide Circuit Filters | Stock-Level Circuit Filters |
|---|---|---|
| Applicability |
Applied to benchmark indices |
Applied to individual stocks |
| Trigger Levels |
10%, 15%, 20% |
2%, 5%, 10%, 15%, 20% |
| Trading Impact |
Market-wide trading halt |
Trading pause only in the specific stock |
| Purpose |
Systemic control |
Stock-specific volatility control |
Both NSE and BSE follow SEBI’s mandated circuit filter guidelines. These exchanges publish their applicable limits regularly. Though implementation is uniform, the frequency of stock hitting circuit filters may differ across exchanges due to trading volume and investor activity.
Circuit filters are vital to maintaining market stability. They regulate price extremes, protect investors from irrational movements, and ensure a more structured price discovery mechanism. Both index-level and stock-level filters play a significant role in preventing market disruptions.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The difference between a circuit filter and a price band is that a price band sets daily permissible limits on how much a stock can rise or fall, while a circuit filter halts trading once these limits are breached.
The index circuit filter thresholds in India are set at 10%, 15%, and 20%, with each level leading to different durations of market-wide trading halts.
The circuit limits for individual stocks in India are set at 2%, 5%, 10%, 15%, and 20%, depending on the category of the stock and its risk profile.
When an index breaches circuit limits in India, trading is halted for a specific duration, which varies depending on the extent of the breach and the time of day.
The circuit filter limits in India are set by SEBI, while stock exchanges like NSE and BSE implement them in accordance with SEBI’s guidelines.
Circuit filters are used in financial markets to curb excessive volatility, prevent panic-driven movements, and maintain orderly functioning during periods of unusual trading activity.
Circuit filters are the same across NSE and BSE as both exchanges follow SEBI’s prescribed thresholds, though slight variations may occur in how they are implemented.