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Strange ways of stock circuits

Unreal and surreal, the Sensex surged by 17.3 per cent – 2,110 points – in an unprecedented single-day surge in the market, but its fine print was fuzzy. The answer lies in technicalities that reflected an unusual day, reports Sandeep Singh.

business Updated: May 18, 2009 21:49 IST
Sandeep Singh

Unreal and surreal, the Sensex surged by 17.3 per cent – 2,110 points – in an unprecedented single-day surge in the market, but its fine print was fuzzy. The answer lies in technicalities that reflected an unusual day.

The index levels are decided by individual components trading at a particular price and even if only one share gets transacted at that price it will decide the visible market value.

“This is what happened today as in the absence of sellers, a few transactions at high prices took the Sensex up ,” said Sanjay Sinha, CEO, DBS Cholamandalam AMC.

Since both BSE and the National Stock Exchange applied their circuit-breaker rules after the record surge, no transaction was there to check if the rally actually was sustainable.

The index hit the circuit twice during the day. A circuit limit is one beyond which the stock price cannot either up or down within one trading day.

If the exchange has fixed a circuit for the index or a stock at 10 per cent, then as soon as the price hits this limit, the exchange will stop trading on the concerned stock or index.

Different stocks have different limits prescribed by the exchanges.

Short covering, the practice of speculators buying shares to make up for their bearish positions, was a major factor on Monday.

“”Everybody wanted to buy including the ones who wanted to cover their position and they put orders on the market price. Buying at market price could take the selling at any figure,” said CJ George, MD, Geojit BNP Paribas Financial Services.