Stock Market-How circuit breakers protects?

You might have noticed since a week how Gold and Silver are falling daily. This falling is sometimes around 6% to 9% in a day trade. During such turbulent bearish or bullish trends how markets maintain their demand and supply and protect investors? Circuit Breaker is the tool which answers all such concerns.

What is the need of circuit breakers?

To say in simple language it works as fuse to your electric system. When found heavy load then automatically disconnect. Same way when any stock or market falls drastically due to some bad news it creates such a havoc that even person who is confident about his portfolio start to sell. In the same way if we see some kind of bullish then stock or index will go high to such an extent that it can exhaust the liquidity of stocks. To prevent such a mad rush circuit breakers are used all over world. This halting of trading for specific time brings traders to think about their actions and the available options to them.

Usually such volatility occurs due to program trading, overvaluation, illiquidity and market crash. But in my view all are interlinked. So protect the investors usually stock market uses circuit breakers.

How many types of circuit breakers?

Mainly their are two types of circuit breakers. One is for specific stock and one for Index. Each stock or Index moves drastically over and below the specified limit then circuit breakers will come into effect to halt the trade for specified period to that particular stock or Index.

Below table gives you the idea about the circuit breaker applicable to BSE and NSE equity and equity derivative market.

This circuit breaker system came into effect after the infamous stock market crash called “Black Monday” on October 19, 1987. World over market crashed around 20% to 45% in a single day.

I noticed during the current fall of silver that sometime buyers were nil (zero) but sellers were around 7000+. In such scenario person who enters into short sell will definitely benefit. But what will be the faith of the buyers? In such scenario I think circuit breakers will give a big relief to traders.

But do you think these circuit breakers works always? Sometimes market regulator fail to activate it. Recent example is on October 5th, 2012, when their was a sudden fall of around 800 points in NSE. Reason may be many like NSE blamed one broking firm for entering huge volume of non-algo market orders. I am giving you such an incidents to make you caution.