Chinese exchanges to implement trading ‘circuit breaker’

Dec 11, 2015
<p>Mechanism will halt trading if market shifts by 5 percent before 2.45 pm</p>

Chinese regulators are poised to implement a ‘circuit breaker’ mechanism in order to prevent any large shifts in the market, such as those seen when the stock market crashed this summer.

Once the measure is implemented, a 5 percent move up or down in the CSI 300 Index – a weighted index based on 300 stocks on the Shanghai and Shenzhen exchanges – will result in a 15-minute ban on all trading, according to a statement issued by the Shenzhen Stock Exchange. If the market moves by 7 percent or more, trading will be suspended for the rest of the day.

‘When the market moves up or down by 7 percent, it usually means there is extreme volatility… and [the market] may face systematic risks,’ says the statement, issued by the Shanghai and Shenzhen exchanges and the China Financial Futures Exchange.

This circuit breaker mechanism will apply to any trades made up to 15 minutes before the markets close at 3.00 pm. Current measures see Chinese exchanges halt individual stocks that rise or fall by at least 10 percent during a day.

These new rules are slated to come in on January 1, 2016, and should offer what Deng Ge, a spokesperson for the China Securities Regulatory Commission, calls a cooling-off period during extreme volatility.

‘It can help stabilize the market and protect market orders and investors’ interests,’ he said in a briefing last week.

The announcement comes hot on the heels of the news that the exchanges and market regulator would once again allow new companies to list. New companies were banned from listings in summer 2015, following widespread market volatility, as part of measures eventually reversed in November this year.

Though the market has largely recovered, gaining 12.4 percent in the past three months, it remains nearly 30 percent lower than before June’s slide.

China’s planned market limits are similar to – if less lenient than – circuit breakers installed by the US following the 1987 stock market crash. A 7 percent drop in the S&P 500 Index would, at that time, have triggered a 15-minute trading suspension for companies listed on the NYSE or NASDAQ.

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