Circuit Filter

Imagine a car with a speed governor that simply will not let it accelerate or brake beyond a certain rate within any single minute, regardless of how hard the driver presses the pedal, specifically to prevent a single moment of panic or recklessness from causing a genuine accident. A circuit filter functions as almost exactly this kind of automatic speed limiter for an individual stock's price movement.

A circuit filter is a pre-set percentage band, commonly 2%, 5%, 10% or 20% depending on the specific stock's assigned category, beyond which a stock is not permitted to trade further in either direction on a given day. If a stock rises to hit its upper circuit, no further buy orders can be matched above that price that day; if it falls to its lower circuit, no further sell orders can be matched below that price, effectively freezing trading at that boundary until the next session, or until the exchange widens the band.

The mechanism exists specifically to curb extreme, panic-driven or manipulation-driven price swings within a single trading session, giving the market, and regulators, time to absorb genuinely significant news without a stock's price spiralling in an uncontrolled, potentially self-reinforcing panic within minutes.

Circuit filters apply differently to different stocks based on their liquidity and volatility history, index heavyweights with high daily trading volumes typically carry a wider band or none at all at the individual stock level, while smaller, thinly traded stocks are given tighter bands specifically because they are more vulnerable to being moved dramatically by a comparatively small volume of trades.

Whenever a stock is reported as having "hit its upper circuit" or "locked in the lower circuit" following major news, that phrase means trading in that specific stock has effectively paused for the day at that price boundary, with a large backlog of unmatched buy or sell orders typically waiting to be absorbed only when trading resumes, often at an even more extreme price the following session if the underlying news was significant enough.