Stocks in circuit filters?

pasha · #1 27th September 2005, 07:14 PM

Since the last few days the Economic Times column "Stocks in circuit filters" has been growing longer and longer. What exactly does circuit filter mean? And why is the column becoming longer and longer?

Traderji · #2 28th September 2005, 09:49 AM

Circuit filter is applied to all the shares to supposedly safeguard the interests of general investors from the extreme volatilities in markets by preventing any unexpected fall or rise in a single day beyond a limit. If the limit is crossed by any of the shares in a single trading day it is frozen for trade.

A major characteristic of circuit-breakers is that it halts trading when the limits are reached. On the contrary a circuit-filter is a ceiling fixed on price movement. In other words assume a stock is trading at Rs 100. If the circuit ``breaker'' level is around 5 per cent, then trading will stop if the stock touches either Rs 95 or Rs 105. If the circuit ``filter'' level is around 5 per cent, then it only means that traders cannot bid/ask quotes below Rs 95 or above Rs 105. Hence, if traders are willing, they can still trade within the prescribed band.

Are circuit-filters essential? Probably not. For instance when information on the true value of the stock is publicly available, it would make perfect sense for the market to realign itself. The need for circuit-filters can be questioned on several grounds. For instance, empirical evidence on the effectiveness of price limits, circuit-breakers and trading halts is ambiguous. But in the case of specific situations where it is clear that the equilibrium value of the asset will change, as in the recent market situation with penny stocks, it makes no sense to set circuit-filter limits. In fact, it goes against the objective of improving liquidity in the market. In the absence of artificial price limits, the prices would have realigned sooner, thereby bringing more liquidity in to the market.

pasha · #3 28th September 2005, 07:27 PM

Thank you, Traderji. As I understand, a 20% daily limit already exists for all stocks so what does keeping a 5 or 10% limit accomplish?
In many stocks I have noticed that the overnight prices jump more than 10% up/down with zero trading volume during the day. This is what really needs to be controlled and the 5% filter can't control this.

rediffh · #4 8th January 2006, 05:04 AM

I have a question -

Why was the circuit breaker not activated in 2004 when Inforsys fell by approx. 50% in one day?

subratabera · #5 8th January 2006, 11:21 PM

Sometimes a stock freezes at 20% and sometimes the same stock freezes at 10% or 5%. I want to know what is the criteria for determining a circuit limit for a stock and why it changes at certain interval. Please give me a detailed answer.

Subrata Bera.

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