China suspends stock trade after a 7% plunge
What's the story
China's stock market was suspended within half an hour of opening after falling 7 per cent. The abrupt decline triggered so-called circuit breakers, which were implemented in a bid to tame the country's volatile markets. This was the second halt this week, following the first one on Monday. In both cases, an initial pause was quickly followed by the markets being shut down.
Circuit Breaker
What is a circuit breaker?
A circuit breaker refers to measures put in place to avert panic in markets by putting temporary halts or a freeze in trading if, for instance, the index in question falls by a pre-determined level. In China, the circuit breaker mechanism is linked to the benchmark CSI300 Index. CSI300 Index tracks the largest 300 stocks listed in Shanghai and Shenzhen.
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China implements 'circuit breaker' mechanism
With effect from 1 Jan 2016, Chinese authorities put in place the 'circuit breaker' mechanism for the country's stock market to keep market volatility in check.
Mechanism
How does the circuit breaker work?
Under the new regulations, when the CSI300 index moves 5%, in either direction from the index's previous closing, trading is automatically halted for 15 minutes. Meanwhile, a 7% rise or fall in the Index will prompt a suspension in trading for the rest of the day. This new mechanism is believed to be another example of Beijing's attempts to control the stock market.
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US too has circuit breaker
Circuit breaker also exists in the US, but with much wider gaps. It temporarily halts trading after a 7% drop in the Standard & Poor's 500 Index, then again at 13% but suspends trading for the day only if losses reach 20%.
4 Jan 2016
Chinese securities regulator defends the circuit breaker
China's stock trade was halted in more than $7 trillion of equities, futures and options, putting the nation's new market circuit breakers to the test on their first day. China's securities watchdog, the China Securities Regulatory Commission (CSRC), defended its use of circuit breaker on the countries' stock exchanges on Monday. CSRC said that the mechanism protected investors and calmed markets.
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India's circuit limits
According to SEBI, India's circuit threshold include 10 and 15 percent for trading halts and 20 percent for shutdown, with longer trading halts imposed as the day progresses.
7 Jan 2016
Criticism of China's circuit breaker
According to investors, the circuit breaker designed to stem volatility, was making it worse. Analysts opine that the trigger levels for the breaker, were too low and too close together to work effectively. In China's volatile market, where a 5% change isn't uncommon, the low threshold level changes the way investors trade in a way that fires up selling pressure rather than cooling it.