SGX plans circuit breakers by year-end

July 8 2011 Jonathon Kwok

THE Singapore Exchange (SGX) wants circuit breakers in place by the end of the year to prevent wide swings in share prices.

They will apply only to blue chips, and click in at times of price volatility by restricting trade and allowing investors to make more considered assessments.

Said a statement by the SGX yesterday: 'The proposed circuit breakers provide an additional safeguard... in times of high price volatility. This move will... increase confidence among market participants.'

Investors here and overseas endured some wild rides after the collapse of Lehman Brothers in 2008 unleashed violent price swings among blue chips.

Nerves were shredded again in the United States in May last year, when a flash crash wiped some 700 points, or about 7 per cent, off the Dow Jones Industrial Average within a few minutes, before a rebound kicked in.

That prompted the authorities to announce new circuit breakers for Wall Street.

Other markets, including those in South Korea, the Bombay Stock Exchange and the Japanese bourses in Tokyo and Osaka, also apply curbs when prices swing wildly.

Singapore's proposed circuit breakers will apply to the component stocks of the benchmark Straits Times Index (STI) and the popular MSCI Singapore Free Index (SiMSCI). There are 30 stocks on the STI and 32 on the SiMSCI, with many overlaps, as some shares are found on both indexes.

Extended settlement contracts based on these counters and exchange-traded funds based on the two indexes will also be covered.

The SGX said these stocks are the 'most likely to impact market sentiment'.

It added that lower-priced shares could also suffer big price swings, but if circuit breakers are triggered frequently on these, it could disrupt the market.

The circuit breakers will operate during the 9am to 5pm trading session, but not during the opening and closing routines.

At the start of the trading day, a reference price for each stock will be set at its opening price. Trading can occur within a price band of 10 per cent above or below this reference point.

But if an incoming order causes a trade to be matched outside this band, the order will be rejected and a five-minute cooling-off period started, allowing market players to re-evaluate the situation.

Trading can continue during this cooling-off period if it is within the original price band.

After the cooling-off period, a new price band will be established. The earlier reference price will either be the lower limit or upper limit of the new band.

SGX statistics show that between 2006 and last year, blue chips mostly stayed within a 10 per cent range of the day's opening price, even during the bull run of 2007 and the post-crisis recovery of 2009.

The exception was around September to December 2008, in the highly volatile period following the Lehman Brothers collapse.

Circuit breakers like those being proposed would have been triggered 261 times in 2008, compared with 55 times in 2009 and only three times last year.

In April, SGX chief executive Magnus Bocker said the bourse operator would introduce circuit breakers by early next year, but the aim now is to bring them in by the end of the year.

The SGX also has other steps to address rapid price movements, such as a 'forced order' key range. This prevents accidental entry of orders outside a prescribed range by requiring market participants to use a forced key function to input the order.

Market participants and the public have until July 28 to comment on the proposal.

The SGX also wants feedback on how structured warrants on blue chips should be treated.


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