Circuit Breaker is a market mechanism designed to temporarily halt trading on a stock exchange when there is excessive volatility or a sudden, sharp movement in index or stock prices. The primary purpose of circuit breakers is to prevent panic selling, maintain market stability, and give investors time to make rational decisions during periods of extreme price fluctuations. Understanding circuit breakers is crucial for investors, traders, and financial market participants.

In India, stock exchanges like NSE and BSE implement circuit breakers at multiple levels. These levels are typically based on percentage changes in the benchmark indices such as Nifty 50 or Sensex. For example, if the Nifty 50 index falls by a predefined percentage, trading may be halted for a fixed duration to prevent panic-driven market crashes. Circuit breakers can also apply to individual stocks showing abnormal price movements.

There are generally three levels of circuit breakers: Level 1, Level 2, and Level 3, corresponding to increasing thresholds of market decline. Level 1 and Level 2 halts are temporary and allow the market to resume after a short cooling-off period, while Level 3 triggers a longer trading halt or closure for the day. These mechanisms help in curbing volatility, allowing investors to reassess market conditions and make informed decisions.

For investors and traders, circuit breakers provide a protective cushion during market turbulence. They are especially important in highly liquid and volatile markets, where rapid price swings can lead to irrational trading behavior. By pausing trading, circuit breakers reduce the risk of flash crashes and promote orderly market functioning.

From a regulatory perspective, circuit breakers are mandated by SEBI in India to ensure market integrity and investor protection. The rules specify thresholds, duration of halts, and the securities or indices to which they apply, ensuring transparency and fairness in the financial markets.

In summary, a circuit breaker is a regulatory mechanism that temporarily halts trading during extreme market volatility to prevent panic selling and maintain stability. Understanding how circuit breakers function helps investors and traders manage risk, make rational decisions, and navigate turbulent market conditions while complying with SEBI guidelines.