Explained: Stock Market Price Bands And Circuit Breakers
To prevent unforeseen shock and volatility, exchanges implement scrip and index-wise limits to keep erratic trading in check
The share price of the Indian Railway Catering and Tourism Corporation (IRCTC) has been under sustained selling since October 19 with the stock falling from a high of ₹6,393 to the current Rs 4200 levels, all over over 6 trading sessions, according to data with the Bombay Stock Exchange.
After rising more than three times year-to-date in a frenzy, it hit the 10% lower circuit last week on October 20. Just a day before that, on October 19, it hit two lower circuits, after it suddenly fell ₹1,000 in a slump. However, it closed at ₹4,214 today, gaining 4.08%.
These are examples of price bands, which are controls set up by exchanges and the regulator Securities and Exchange Board of India (SEBI) to prevent unforeseen volatility and shock, and to curb price manipulation. Under these controls, depending on the stock in question, trading is halted completely or temporarily, from where the circuit can be extended in either direction depending on the market trend.
While IRCTC, saw a downward trend, the shares of Tata Motors hit an upward trend since September 24, rising from just above ₹317 levels to hit a high of Rs 532.40 in the last one month.
Also Read: Explained: Why IRCTC's Share Price Plunged, Govt Reverses Decision
While price bands are at the stock-level, another such measure, applicable at the index level, is called a circuit breaker.
Here's what you need to know about these measures.
A price band means that orders cannot be placed for a particular stock that is above the upper-limit or lower than the lower-limit of the stock. These bands are set by the exchanges daily and are based on the previous day's closing price.
Individual stock-based price bands are applicable up to 20% either way. Price bands can also be 2%, 5% or 10% (all either way).
Price bands are not applicable to those stocks on which derivative products are available. Derivatives are market instruments that derive their value from some underlying asset, which in this case is the underlying price of the stock, but can also extend to currency, metals, cryptocurrencies, bonds, interest rates or even other derivatives.
On these scrips where traditional price bands are not applicable and on derivatives themselves, there is also a feature called 'dynamic price bands' applicable in Indian markets.
It is applicable to:
- Stock on which derivatives are available
- Stocks included in indices (like NIFTY Bank) on which derivatives are available
- Index futures, a derivative product
- Stock futures, also a derivative product
The dynamic price band would be at 10% (either way) of the previous day's closing, and is to be relaxed in increments of 5% (in the appropriate direction) in event of a market trend.
Stock exchanges have the authority to formulate the rules that govern the relaxation of such dynamic price bands.
This can be read in a SEBI discussion paper here.
Also Read: Indian GDP Estimates Unchanged At 9.5%, But Global Recovery Slowing: IMF
Circuit breakers are applied to indices at three levels: when an index hits 10%, 15% or 20% in either direction of trade. These percentages are relative to the previous trading session's closing.
The indices applicable are the benchmark Sensex on the Bombay Stock Exchange and the NIFTY 50 on the National Stock Exchange, and the circuit breaker will kick in when any of these indices first hits the one of the above mentioned triggers.
When a circuit breaker kicks in, there is a national shutdown in trading in all equity markets for a period of time; the duration of which in turn depends on the magnitude of the trigger and the time when the trigger was hit. The exact brackets can be found below.
After every given instance where trading can resume post the market halt, there is a pre-open auction session to determine the market prices for stocks (or price equilibrium) for 15 minutes. These sessions occur daily for 15 minutes to determine the opening price for trading, which occurs between 9:30 am to 3:30 am.
Read about circuit breakers here.
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