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Commentary

SEBI Makes Market-Halt Circuit Limits Dynamic

SEBI has decided to alter the circuit breaker limits for stock exchanges. Currently, market wide circuit breakers apply after a 10% change (1 hour), 15% change (2 hours) and then 20% (rest of trading day). This halt will apply to all stock exchanges, including derivative markets.

The current limits are decided once a quarter, and depend on the closing value of the benchmark indexes in that quarter. However, given that this quarter began substantially higher, the 10% limit may actually be a 12% drop!

So from October 1, limits will be set at the end of each closing day.

Also, since a recovery might again be disruptive or manipulated, the resumption will involve a call auction for 15 minutes (just like the 9:00 to 9:15 call auction). That also means instead of a 1 hour halt after a 10% change, we will see 45 minutes of a total halt, and then the 15 minute call auction, and a similar structure for the two hour halt.

We have had four circuits that I remember:

  • October 2007 (down circuit, after SEBI tried to regulate FII P-Notes)
  • January 2008 (down circuit, after news on Bear Stearns and general lack of liquidity)
  • October 2008 (down circuit after the big Lehman crash)
  • May 2009 (20% up circuit after two halts, post election results)

Is the SEBI notification a note of increasing volatility? Will we see a circuit soon? I hope not, but as a trader, I can’t deny I like volatility. This could be prophetic.