22 May 2015 17:55 IST

Circuit Breakers

Watch Aarati Krishnan explain how the stock markets decide their 'time-outs' and why

If your class gets unruly and two groups of students descend to fisticuffs, it’s almost certain that the teacher would declare a time out until the errant ones settle down. Well, the stock exchanges too do something similar when trading gets very volatile and emotions tend to run high among traders in the stock market. When the exchanges declare a time-out, it’s called a circuit-breaker.

A circuit-breaker is a specified limit for the index at which the stock exchange halts all trading in all shares.  The circuit-breakers are usually fixed by the traders in advance and the exchange tells you at which levels of the market the trading will be halted.

In the video, Aarati Krishnan explains how circuit-breakers work in the Indian market, the three levels of market-wide circuit-breakers, why we need them, the way circuit breakers kick in simultaneously in the Sensex and the Nifty, and how they are implemented.