Market Wide Circuit Breaker (MWCB)
What is Market Wide Circuit Breaker in stock market and when is it triggered?
The Market Wide Circuit Breaker refers to the emergency measures/steps that are taken, when the Benchmark Index moves by a certain percentage, within a day. Usually, these actions include a temporary stoppage in trading of all the securities that are listed on the Stock Exchange. In some cases, the trading could be shut down for the remaining day.
The term ‘Market Wide’ is used in MWCB because it impacts all the securities that are trading on the Stock Exchange. The concept is widely used around the world, and it can be applied by tracking the change in value of the respective market index in the region, like NIFTY, SENSEX, S&P 500, NASDAQ Composite etc.
The MWCB in stock market can be triggered in both directions, if the market price touches either the upper or lower Circuit Limit. This Circuit Limit for the Benchmark Index is usually notified by the Stock Exchange at the beginning of the trading session.
Market Wide Circuit Limit
The Market-Wide Circuit Limit is usually communicated in percentage terms, and the price limits are calculated from the previous Closing Price of the Benchmark Index. Both the upper and lower price limits can be measured by using the same percentage.
Example: Let us assume that the Benchmark Index closed at a price of INR 70,000 in the previous trading session. Suppose that the MWCB on Stock Exchange is defined at a price of +/- 10% for the Index. This percentage movement will translate into the following change in the value:
10% of INR 70,000 = INR 7,000
So, the Upper Circuit and the Lower Circuit value for the Benchmark in the current session can be calculated as follows:
INR 70,000 ± INR 7,000
Therefore, based on the previous Closing Price, the trading price band for the index will become: INR 63,000 to INR 77,000. If the price of the index touches either of these values within the day, then the MWCB in share market will be triggered.
Circuit Breakers
The supply and demand will govern the movement in the market price of all the financial securities in the market. And this movement in the price of the securities will lead to a change in the value of the Benchmark Index.
In some rare cases, the prices can rapidly move in a day, when there is a major mismatch in the supply and demand of securities. For example, when a major positive or negative news breaks out in the market. A swift change in the value of a Benchmark would mean that the prices of the underlying securities are moving quickly.
When certain price thresholds (Circuit Limits) are hit, then some actions need to be taken by the Stock Exchange to protect all the market participants. So, the idea of Circuit Breakers was introduced, to restrict the rapid increase or decrease in the market prices. This could be applied to individual securities, and it could also be applied at market level, on the Benchmark Index.
Need for Circuit Breakers
The main reason for defining Market Wide Circuit Breakers is that it provides some time to the market participants to reconsider their buy or sell decisions. This helps in preventing a sudden outspread of panic or euphoria in the market.
So, the Circuit Breakers safeguard the interest of market participants, by restricting the maximum and minimum profit/loss that can be made in a day. This way, the traders can avoid making rash trading decisions, when the market prices are changing quickly.
Levels in Market-Wide Circuit Breaker
Depending on the magnitude and the speed at which the market prices are moving, there are multiple pre-defined price levels that are set. This means that there could be different MWCB measures / actions that might be implemented at the different levels of price movement.
Based on the regulatory guidelines in the region, the Stock Exchange will pre-define the percentage movement in price, that constitutes the various levels. In addition, the actions that will be taken at each price threshold will also be informed in advance. When the trading session is active, the Stock Exchange monitors the change in price, and takes relevant steps when the Market Wide Circuit Breaker is hit.
Example: The Stock Exchange in a particular region might categorize a Level 1 change as an increase/decrease of 10% in the Benchmark Index. So, the first Market Circuit Breaker might get triggered at this level.
Similarly, a 15% rise/fall in the price might be considered as a Level 2 movement, where the second Circuit Breaker is placed. And a 20% change in price could translate into a Level 3 change.
Halt after MWCB is triggered
If the market price of the Benchmark Index touches any of the defined Circuit Limits, then the trading will be temporarily halted for all the securities in the market. The duration for which the trading is suspended will depend on the time at which the MWCB in stock market is triggered, and the percentage change in the price of Benchmark Index.
The planned duration for which the trading is stopped in India due to the Market Wide Circuit Breakers has been explained in the below table.
| Price movement from previous Close Price (Up or down) | Time restriction on the trade day | Duration for which trading is suspended |
|
10%
|
Before 1:00 PM | 45 minutes + 15-minute Pre-Open |
| At or after 1:00 PM, till 2:30 PM |
15 minutes + 15-minute Pre-Open |
|
| At or after 2:30 PM | 0 minutes | |
|
15%
|
Before 1:00 PM | 1 hour 45 minutes + 15-minute Pre-Open |
| At or after 1:00 PM, till 2:00 PM |
45 minutes + 15-minute Pre-Open |
|
| At or after 2:00 PM | Remainder of the day | |
| 20% | Any time | Remainder of the day |
Pre-open session after suspension
As explained above, the trading is briefly suspended after a Market Wide Circuit Breaker in share market has been triggered. If the trading is resumed on the same day, then a 15-minute pre-open trading session is conducted.
This special session prevents sudden price movements, and helps in smoothly resuming the trading. A price discovery for all the securities is done on a Call Auction basis, where the orders are first collected, and then matched with each other. This is very similar to how the Pre-open session works at the start of the trading day. (Refer: What is Pre opening session in stock market?)
On a high level, this 15-minute pre-opening session can be broken down into the following three sub-sessions or phases.
Order collection phase: In this duration, the traders send their orders to the Stock Exchange. This phase closes at a random time between 7 to 8 minutes, after the start of the pre-open session.
Order matching phase: Just after the close of order-placement phase, the orders that have been received are matched with each other, and the opening price is calculated. All the trades get executed at this particular price. The orders which cannot be executed are added to the Order Book for normal trading.
Buffer period: Once the trade execution is done, there is a small buffer period of usually 3 minutes. No action is taken in this duration, and it helps to smoothly transition from the pre-open session to normal trading.
For more details about how circuits work in India, Refer: What happens when Stock hits Circuit Breaker?
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