What are Circuit filters & trading bands

Stocks and indices act to buy and sell trades in the market, but unexpected news, whether positive or negative, can cause significant price movements, increasing market volatility. Such volatility can be harmful to retail investors, who frequently react late to news and may struggle to execute deals at favourable pricing. To reduce volatility and protect investors, SEBI implemented circuit limits and price ranges in the market.

So, before understanding the circuit limits, let’s understand trading bands which are also known as price bands. Stock exchanges set the range of stock price movements during trading hours, beyond which trading is temporarily halted or restricted.

Circuit filters typically consist of upper and lower price limits within which traders can trade during a single trading session. These limits are usually based on the previous day's closing price and once triggered, they halt trading temporarily (circuit breaker) or limit price movements to prevent extreme volatility.

Price limits are imposed by regulatory authorities SEBI (Securities and Exchange Board of India) to prevent excessive price movements in indices or equities with futures and options (F&O) contracts. This range can be from 2% to 20%, depending on the volume, liquidity, and kind of stock.

In the case of Indices, the duration of the market halt and pre-open session are as follows: