Price Limit Analysis

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

The repercussions of circuit breakers on market liquidity, volatility and price discovery processes have attracted a great deal of attention from market participants, regulators and academicians. In reality, most stock exchanges have experienced recurrent changes in price limit rules. Case in point, the Taiwan Stock Exchange used 11 different daily price limits since 1962 with its most recent change from 5% to 7% in 1989 (Ke, Huang, Liao, and Wang, 2013). Similarly, the Stock Exchange of Thailand raised up the price limit from 10% to 30% in the second half of 1997 (Kim and Shamsuddin, 2008; Lim, Brooks, and Kim, 2008). The Korea Stock Exchange (KRX) raised its limits from 4.6% to 15% in four stages from 1995 to 1999 and its most recent change from 12% to 15% was executed on December 7, 1998 (Kim and Shamsuddin, 2008). Most of past studies on price limits are confined to the analysis of daily price movements and the main focus is on the post-limit hit period. Less explored is an aspect of price limit: the gravitation or magnet effect. Gerety and Mulherin (1992) observe investors' desire to trade prior to daily market closings, in line with the magnet effect. However, whereas a price limit closure typically is associated with large market movements and high volatility, a regular closing may not be. A regular closure also is certain, whereas a price limit closure is

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