Circuit Filter
A circuit filter is a price-band mechanism imposed by stock exchanges or SEBI that halts or restricts trading in a security or index when its price moves beyond a pre-defined percentage threshold within a single trading session, preventing extreme volatility and panic.
Circuit filters operate at two levels in India. Index-level circuit breakers apply to the broad market and are triggered by movements in the Nifty 50 or Sensex. A 10% index movement triggers a 45-minute trading halt; a 15% movement triggers a 2-hour halt; a 20% movement triggers closure of the market for the rest of the day. These thresholds were put in place by SEBI after the global financial crisis to prevent circuit breakers from being too easily triggered during normal volatility.
Stock-level circuit filters apply to individual securities. SEBI and the exchanges categorise stocks into different circuit filter bands: 2%, 5%, 10%, or 20%. A stock with a 10% circuit filter cannot move more than 10% above (upper circuit) or 10% below (lower circuit) its previous closing price in a single session without trading being halted. Stocks in the F&O (futures and options) segment do not have individual circuit filters because the derivatives market provides continuous hedging; instead, they rely on dynamic price bands.
The circuit filter system is intimately connected with the Graded Surveillance Measure (GSM) and the Additional Surveillance Measure (ASM) frameworks. Stocks placed under surveillance typically have tighter circuit filters applied as one of the restrictions.
In practice, small-cap and mid-cap stocks with low trading volumes frequently hit upper circuits during bullish phases, creating a situation where buyers exist but no sellers are willing to sell at the circuit price. This can lock in investors at artificially elevated prices and make exit very difficult. Similarly, stocks hitting lower circuits repeatedly during a crisis can trap investors who cannot exit at any price.
For investors, understanding circuit limits before entering a position—especially in illiquid stocks—is essential risk management. A stock with a 5% circuit filter that hits the lower circuit for several consecutive sessions may take many trading days before an investor can fully exit the position.