PSX all set to introduce market halt, circuit breakers widening

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KARACHI: The Pakistan Stock Exchange (PSE) is all set to introduce both the widening of circuit breakers and a market halt from Monday (January 20).

The maximum limit on a rise or fall for an individual share price will increase from 5per cent at present to 7.5pc eventually. This means the band within which a share’s price can move has increased from 10pc to 15pc.

Circuit breakers will be increased on a fortnightly basis, starting from Monday. The proposed schedule for the circuit breaker enhancement is February 4 (6pc), February 19 (6.5pc), March 5 (7pc) and March 20 (7.5pc).

The PSX had initially made the announcement in a notice sent out on December 13 last year.

“The existing circuit breaker of 5pc or Re1, whichever is higher, will be enhanced by 0.5pc every 15th day till the time the circuit breaker reaches the level of 7.5pc or Re1, whichever is higher,” PSX GM and Acting Chief Regulatory Officer Abbas Mirza stated in a notice.

Concurrently, market halts will also be introduced. Starting from January 20, the exchange will apply index-based market halt in case the KSE-30 index moves 4pc either way from its opening index value.

However, once circuit breakers reach the level of 7.5pc, market halts will only be applicable in case the KSE-30 index moves 5pc either way.

“Where KSE-30 Index moves 4pc (these days) or 5pc (later on), as applicable, either way, for consecutive 5 minutes, market halt will apply for 45 minutes. It may be noted that market halt will not be applicable in case KSE-30 Index moves beyond 4pc or 5pc as applicable in the last one hour of the market,” the notice also clarifies.

During the halt, equity and equity-based derivative markets will be suspended. The market will also have a five minutes pre-open before its re-opening.

As per the exchange, the market halt helps in managing risks and allows for adequate cooling-off period to the investors to assess the market.

The move to relax the rules and broaden the circuit breakers is both an attempt to accelerate trade activities, but also to help calm volatility.

Some analysts say the existing circuit breakers’ limits are too narrow for the current time period. Pakistan’s circuit breaker’s limits used to be 7.5pc, but were brought down to 5pc after extreme volatility in 2008.

Previously, Bloomberg had reported that Pakistan had experienced historical volatility that led to a two-year high in the equity index in September 2019.

What’s a circuit breaker?

A circuit breaker is essentially a financial instrument used as a trading ‘curb’.  Globally, circuit breakers are used to reduce market volatility, and to avoid massive sell-offs and stock market crashes. In some cases, they are also used to prevent speculative gains.

If prices move rapidly outside of predetermined bouds, the circuit breaker is triggered, and trading is monetarily halted for a short period of time. This allows for more accurate information among traders, and gives time for traders to reconsider transactions, thereby reducing volatility.

Circuit breakers bounds are frequently revised based on how past crises have unfolded in stock exchanges.

Circuit breakers were put in place for the first time after the global market crash of October 19, 1987- also known as Black Monday.

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