One of the methods of risk management that the exchange follows is the use of price bands and circuit filters. While price bands are applied to specific stocks, the circuit breakers are applied to the various indices. An index based market-wide circuit breaker system applies at three stages of the index movement either way (up and down)at 10%, 15%, and 20%. These circuit breakers bring about a coordinated trading halt in trading on all equity and equity derivatives markets across the country. To avoid any calculation confusion, the circuit breakers are triggered by such movements in either Nifty 50 or Sensex, whichever is breached earlier. The following rules are followed:
In case of a 10% movement in either of these indices, there would be a one-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be a trading halt for 30 minutes. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and the market would continue trading.
In case of a 15% movement of either index, there should be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00 p.m. but before 2:00 p.m., there should be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading should halt for the remainder of the day.
In case of a 20% movement of the index, trading should be halted for the remainder of the day. This is irrespective of the time at which the breach occurred.
NSE may so cancel the orders in the absence of any immediate confirmation from the members that these orders are genuine or for any other reason as it may deem fit. The Exchange views entries of non-genuine orders with utmost seriousness as this has market-wide repercussion.
In the past, there have been instances of such circuit breakers being triggered in the market in May 2004, May 2006, November 2007, January 2008 and May 2009. Of these only May, 2009 was an index upper circuit while the rest were index lower circuits.