Circuit Breakers In Asia
Why Do The Exchanges Halt Trading? Generally this is done when a company is about to make a big announcement that will materially affect the fortunes of the business. Trading in the stock is halted so that this news can be widely disseminated giving no one an unfair advantage capitalizing on this information. The strong form of the Efficient Market Hypothesis implies share prices reflect all information public and private.
More dramatically and what we saw around Asia January 22, 2008 was the wholesale suspension of trading of all stocks in the height of a selling frenzy. The Bombay Stock Exchange halted trading (or more commonly called Circuit Breaking) for about an hour just after the open when the Sensex 30 was down a whopping 10%. It continued down 13% after it resumed trading to close on the day at 16,729.94 down 4.97%.
Similarly, the Korea Exchange halted trading across the board as its benchmark index the KOSPI 200 sunk 6%. It was the fourth time in the exchanges history to suspend trading. The halt was only for 5 minutes but all the same no trading could be done in Korea shares.
Why do the exchanges halt trading when you are trying desperately to get out of your position? The simple answer is to restore calm and order in an emotional trading environment. During the outage no new orders can be placed but some exchanges, depending on their technology, will allow you to cancel orders. Once calm has been restored the exchange will start the process of the pre-opening period and finally the regular trading session will begin.
Each exchange has their own Circuit Breaker policy. For example, the Korea Exchange has posted on their website:
“.all the trading shall be suspended in case KOSPI decreases continuously for 1 minute more than 10% of closing price of the very preceding day.”
“Once circuit breakers is exercised, suspension is made for 20 minutes.”
The Stock Exchange of Thailand has a two tiered policy. If the SET50 index falls by 10% from the previous day’s close, all trading in listed securities will be halted for 30 minutes. In the second stage if the SET50 index falls by 20% from the previous day’s close (i.e., another 10%), trading in all listed securities will be halted for one hour. Bursa Malaysia has a three tiered trading halt rule of 10%, 15% and 20%. The Japanese market, TSE and OSE, have a circuit breaker policy depending on the theoretical price of their respective indices. Different levels trigger at different price changes and trading is suspended for 15 minutes. The Singapore Exchange has a 7.5% circuit breaker rule then a 12.5% limit.
The idea of the Circuit Breaker was introduced in November 1992 to stop extreme trading movements and bring about order to an otherwise irrational trading environment. Curiously enough it was the Bombay Stock Exchange on Tuesday, 9 March 1993 that was the first exchange to ever implement a trading halt when the Sensex traded from 2451.20 to 2318.26 (down 5%).