Circuit Breaker Case Study

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1. Introduction A circuit breaker, in engineering, is used as an automated switch designed to protect an electrical circuit from excess current emanating from overload or short circuit. Financial market regulators borrowed this approach since the late 1980s in imposing collars on security prices, stunting its intraday growth or decline beyond a certain bracket. Though this control mechanism first gained attention following the Black Monday crash of October 1987, interest in it has rekindled since the flash crash of May 2010 in US markets. Ostensibly, its purport is to dissuade investor overreaction, enforce regulatory control at micro-structure level to prevent crashes, and to smoothen volatility. The efficacy of price limits has been hotly…show more content…
The stock-specific limits at the time were stipulated at 15% per trading session for old listings and 500% for new listings. This limit was later doubled to 30% on December 15, 1989. In the beginning, market circuit-breaker was set at 10% for the-then benchmark index: KLSECI. Since 1989 BM/KLSE’s 30% stock-specific price limits are intact, albeit with some minor changes. First, from Quarter 1 of 2002, KLSE moved to a 3-tiered market-wide circuit breaker is a 3-tiered mechanism. Initially, a 10% fall in KLSECI suspends all market instruments for 1 hour. A subsequent 15% drop (5% after the first trigger) halts trade for 1 more hour. Upon resumption, if the KLSECI further falls by 20%, trade is suspended for the remainder of the day. This holds true till this day, except the benchmark index is now called FBM KLCI (since July 2009). The index circuit breaker mechanism only halts trading temporarily when triggered. All clearing, settlement, and depository operations continue normally. It was also during this period that KLSE began migration to a fully automated trading platform and set 400% upper limit and 30% down limit for newly listed (IPO) securities priced over RM 1. For below RM 1 IPO listings, upper limit was set at 400% or 30 sen (cents), whichever is achieved first, and lower limit is 30 sen (cents). On 15 May, 2006 Bursa Malaysia’s circuit breaker rules were amended to facilitate more liquid trading of ABF Malaysia Bond Index Fund. Bursa Malaysia justifies this practice through claims of internal study of index movements over a period of time including instances of sudden and sustained deceleration of index as well as a comparative studies of international best practices (Asmar & Ahmad

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