Review upper circuit limit, say experts

With markets hitting an upper circuit limit within seconds of opening for the first time in history, a section of players feel the cap needs reviewing.

Since the norms were codified in 2001, the stock market has witnessed a sea change. As a result, they feel there is a strong case for revising those limits.

Says Ajay Shah, senior fellow, National Institute of Public Finance and Policy: “It would be a better option to let the trades continue. I would like to advise something called the ‘call option’ which in India was earlier used as a pre-opening option.”

In this method, before the market opened, brokers were allowed to put their deal at a specified price. This mechanism has been discontinued now.

Shah suggests a similar mechanism be introduced whereby as and when the Nifty hits 10 per cent, trading should be stopped. And the market moves into a call option mode for 15 minutes, where traders would be allowed to put buy and sell orders, but no actual trade would take place.

This would help the market participants to understand the trend when the market reopens. The computer shows the equilibrium price at which the number of orders can be cleared but no trade fixes.

Others experts said while the current system of checks and balances is right, it makes sense to review the circuit limits. Ashvin Parekh, Partner, Ernst & Young, said, “Having a circuit limit in place is justified because we cannot draw parallels between our market and other developed markets. However, a periodic review should be taken.”

Ajoy Veer Kapoor, Managing Director, Saffron Asset Advisors, said: “I think the upper circuit ceiling can be reviewed. As Indian markets have started to mature and there is more liquidity than earlier, that figure should be revised.”

Globally, there are no circuits on the Australian, Hong Kong, Shanghai and Taiwan stock exchanges. There is no circuit in the cash market on the Singapore stock exchange. However, there is a 15 per cent circuit on Strait Times Index futures. On the Nasdaq and Irish exchanges, there are no circuit filters on indexes but there are circuits on stocks.

The Chicago Board’s option exchange has a sell circuit of 10 per cent, 20 per cent and 30 per cent on the Dow Jones Industrial Average. The Tokyo stock exchange does not have a circuit breaker in the cash market, but there is on the futures and options market.