How will US Circuit Breaker Policy Affect Asia’s Markets?
The May 6 “Flash Crash” as the US has dubbed it has raised the probability that a carefully defined set of circuit breaker rules will be implemented across all equity and futures trading venues across America. While the exact cause of the 6 minute sell off is not known with certainty and is still being investigated it is believed that, in part, incongruent safety measures across the US exchanges were to blame. “We continue to believe that the market disruption of May 6 was exacerbated by disparate trading rules and conventions across the exchanges,” said Mary Schapiro Chairman of the Securities and Exchange Commission in a statement released May 18. It has been proposed that when a security moves 10 percent in either direction over a 5 minute period that trading be halted for 5 minutes across all trading venues.
But how will this affect Asia’s markets whose regulators and practitioners have had the advantage of observation? The notion of halting trading during volatile periods is nothing new to Asia. In fact, the Bombay Stock Exchange (BSE) on Tuesday, March 9, 1993 was the first exchange to ever implement a trading halt when the benchmark SENSEX lost 5% of its value. Most of Asia’s bourses have implemented some kind of circuit breaker policy. 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.
There are 2 exchanges that don’t have any specific guidelines and they are the Australian Securities Exchange (ASX) and the Hong Kong Exchange. The ASX does have the power to halt trading at its discretion, however. It is perhaps these 2 exchanges that will be most affected by the ruling coming out of the US. Largely retail markets whose regulators strive ardently to protect its investors from unscrupulous trading practices could feel pressure if nothing is done especially if a large sell off wipes out a portion of the local wealth. Finger pointing will ensue and questions raised as to why the regulators haven’t done everything they can to protect the little guy. The Hong Kong government caved to public sentiment on the Lehman Mini Bond fiasco returning a large portion of the money lost by investors. I think they will want to avoid the public outcry and nip this issue in the bud before it happens.
The US plans to implement their circuit breaker rules on December 10, 2010 on a pilot basis and maybe by then the ASX and HKEX will have something more concrete for its exchanges and investing public.