What are circuit filters and trading bands?

What are circuit filters and trading bands?What are bull and bear markets?What are level 2 quotes?What is the bid and ask? What is a stock split?

What are circuit filters and trading bands?

Securities and Exchange Board of India (SEBI), has set some rules to check the volatility of shares and to determine the fixed price bands for different securities within which they fluctuate in a day.Here in this article we will be discussing about circuit filters and trading brands.

What are circuit filters?

Circuit filters are price bands enforced by the SEBI (Securities Exchange Board of India) to limit the movement of stock prices (up or down), of listed securities. The purpose is to control manipulation done in share prices by operators. Stock exchanges introduced circuit filters, according to SEBI guidelines to prevent a sharp fall/rise in stock prices and to protect interest of investors from volatility in price.

For example:

When the stock price crosses a specified price range as decided by stock exchanges, trading in that particular stock is suspended. Forexample, if you have a share price of Rs. 100, and there is a circuit breaker of 10%, it willstop trading if the share price reaches above Rs. 110. In the same way, if the stock price falls below Rs. 90, the lower end circuit filter is applied and trading is suspended.

Circuit breakers are applied only on equity and equity derivatives markets.Whenever the major stock indices like Nifty and BSE Sensex cross the threshold level, SEBI rules require that thetrading at the stock exchange be stopped for a particular period of time starting from half an hour to even one full day.The time span for which trading is stopped depends on the time and amount of movement in the indices. The idea is to let the market cool down and restart trading at normal levels.The thresholds are applied stage wise.

Circuits limit for stock exchanges

There are three circuit filters for indices- 10%, 15% and 20%. These filters are applied to Sensex or Nifty whichever first crosses the limit. The trigger also depends on the time at which it takes place.

10% drift on either side

  • If the drift is before 1 pm – 1 hour halt
  • If the drift is after 1 but before 2:30 pm – half an hour halt
  • If the drift is after 2.30 pm – no halt

15% drift on either side

  •  If the drift is before 1 pm – 2 hours halt
  • If the drift is after 1 pm but before 2 pm- 1 hour halt
  • If the drift is after 2 pm – no further halt

20% drift in either direction

In case of a 20% movement in either index, the trading will halt for the rest of the day. The circuit filters are reduced in case of liquid scrips. The circuit filters are reduced to 10% or 5% or 2% according to the criteria decided by the stock exchanges.

No circuit filters are applicable on scrips in which derivative products are available and scrips which are liquid and included in indices on which derivative products are available.

But, the BSE enforces dummy circuit filters on these scrips to avoid purchasing errors.

What are trading bands?

Linesdrawn in and around the price structure to create an envelope, describingwhether prices are high or low on a comparative basis andindicating whether to buy or sell by using indicators to confirm price action.

Trading brands are also referred as envelopes.An envelope comprises of two moving averages. One moving average is shifted upward and the second moving average is shifted downward.


Envelopes define the upper and lower limits of a security’s normal trading range. A sell signal isgenerated at the lower band. The maximum percentage shift depends on the volatility of the security- the more volatile, the larger the percentage. The concept behind trading band is that overzealous buyers and sellers push the price to extremes at which point the prices usually stabilize by moving to more realistic levels.

What are bull and bear markets?

A bull market

Bull market is when the market shows confidence. Indicators of confidence are prices raising, marking indices like the NASDAQ also rise. Numbers of shares traded are also high and even the number of companies entering the stock market show that the market is confident.

These characteristics are bullish. You may hear a market is a bull market if there is a run of bullish days. However, technically a bull market is a rise in value of the market of at least 20%.

A Bear market

A bear market is the opposite of a bull market. If the markets fall by more than 20% then this is a bear market. A bear market shows lack of confidence. Price hover at the same price then fall, indices fall too and volumes arestagnant. In a bear market, traders wait for the bulls to start driving the prices high again.

What are level 2 quotes?

Level 2 provides huge insight into a stock’s price action. With this you can find out what type of traders are buying or selling a stock, where the stock is expected to head in the near term and lot more.

It is mainly the order book for Nasdaq stocks. Orders are placed through different market makers and other market participants. Level 2 will give you ranked list of the best bid and ask prices from each of these participants, providing you detailed insight into the price action.Finding out exactly who has an interest in a stock can be very useful, especially when day trading.

What is the bid and ask?

The bid price

The bid price as name suggests is the price someone is ready to pay for a share of a Company.

Say, if you own ABC Company’s stock and want to sell it you would want to find out what someone would be ready to pay for it. Simple. Look at the bid price. Say, the highest that someone would be ready to buy ABC Company is $500. So, if you decide to sell your stock, you would be able to sell it for $500.

The ask price

The ask price is the price someone is ready to sell a share of ABC Company for.

Say, if you wish to buy some shares of ABC Company, you would want to know how much someone would be ready to sell it for. So, you need to look at the ask price. The lowest someone is ready to sell ABC Company for is $500. So, if you want to buy ABC Company right now, you could buy it for that price.

What is a stock split?

A stock split is a decision of the board of the company to increase the number of outstanding shares. If a company decides to split the stock, in place of one share of a particular face value, the shareholder will have two shares of the same but equally divided face value. The stock can be even split in a 3-for-1 or 5-for-1 way.

How it benefits investors?

A stockholder will get two or three shares for one without additional cost, making it simpler to carry out trades. Also, stock splits can be a great way for retail investors to collect a higher number of shares of blue-chip companies which are generally costly.

We hope you found this article helpful and many of your doubts are now clear.