Circuit filter is a mechanism used by stock exchanges to curb excessive volatility in markets. It is the maximum fluctuation in price allowed during trading. Trading gets suspended if the maximum permissible limit is hit in either direction. The circuit limit gets fixed for individual stocks and indices like Sensex and Nifty.
Last year market regulator Sebi asked stock exchanges to calculate circuit limits on a daily basis. Earlier it was fixed on a quarterly basis.
For widely tracked Sensex and Nifty, circuit limit applies at 3 stages of the index movement, either way: 10 per cent, 15 per cent and 20 per cent. For example, circuit filter would be triggered today if Nifty moves 712.30 points (10 per cent), 1068.45 points (15 per cent) or 1424.65 points (20 per cent) in either direction, based on Nifty's close of 7123.15 on May 15, 2014.
Trading gets suspended temporarily or rest of the session depending on the circuit limit and the time when the circuit limit gets triggered.
Below are the circuit breaker rules for Sensex and Nifty that were implemented in October 2013.
Result: Markets close for rest of the trading session.
Result: If it is hit before 1 pm, trading is halted for 75 minutes. If it is hit between 1 pm and up to 2 pm, trading is halted for 45 minutes. If hit on or after 2 pm, markets close for the day.
Result: If it is hit before 1 pm, trading is suspended for 45 minutes. Between 1 pm and up to 2.30 pm, trading is suspended for 15 minutes. If it is hit at or after 2:30 pm, there is no halt in trading.