Circuit Filter is a regulator- prescribed price limit on stock indices for the safety of investors. It sets a limit on the extent to which an index such as NSE Nifty or BSE SENSEX can fluctuate in a day. The filter, followed by a cooling-off period, kicks in once an index rises or falls by 10%, 15% and 20%.For instance, if a circuit limit of 10% is hit before 1’o clock in the noon, trading automatically stops and resumes after an hour. In case of a 20% movement of the index, trading is halted for the remainder of the day.
The moment a circuit filter is triggered on the cash segment, trading comes to an automatic halt. In the case of index futures trading does not halt automatically but has to be stopped after trading on the cash segment ceases.
Circuit breakers are only for indices. The regulator has a price band for shares in the cash segment and an operating range for the future and options segment. Individual stocks have a price band of 20% from its previous day’s closing. A stock exchange is allowed to reduce this band to 10%.
Market regulator Sebi plans to lower the circuit filter limits for all stocks to 8% which are also traded in the derivatives segment following the recent flash crash on NSE where 50 stocks were traded at about 20% lower level than their previous closes. The Sebi move seeks to provide a safety net for investors in case of a sudden crash, minimize losses and make the markets a safer place.
At present, each individual stock enjoys a 20% movement on either side of their previous close. And for the two leading indices—BSE Sensex and NSE nifty—Sebi rules stipulate that if any one of the two indices moves 10% of its previous quarter’s closing level on either direction on any day, the market has to halt trading. After a cooling off period, which depends on at what time of the day trading was stopped, the next applicable circuit of 15% and then 20% come into play. F&O stocks have operating ranges, again at 20%; that is , an order can not be placed by trader above or below the 20% limit.
The filter percentage is calculator on the closing index value of the previous quarter. For April-June quarter, the daily filter is set based on the index closing on the last trading day of the March quarter (Let 10,000 points on March 30).So to calculate the 10% filter percentage for April 10, add and subtract 1,000(10% of 10,000) to Index April 9 closing of 10,100(10,100+/- 1,000) to get 11,100 as the upper limit and 9,100 as the lower limit.