Taming swings: China adding circuit breakers to stock market
China will introduce circuit breakers to the Shanghai Stock Exchange, Shenzhen Stock Exchange and China Financial Futures Exchange on Jan. 1, 2016, Shanghai Stock Exchange said in statement on Friday.
According to the plan been approved by China’s Stock Regulatory Commission (CSRC) if the CSI 300 benchmark index experiences either a 5% rise or fall trading will be suspended for 15 minutes on all the the country’s equity indexes, while a 7% move up or down will trigger suspension of trade for the rest of the day. If a 5% move occurs after 2:45 pm, trading will stop for the rest of the day.
The US first installed circuit breakers after the stock market crash of 1987, they are designed to prevent a full-blown panic among investors when the indexes experience a sharp decline. By halting trading, the circuit breakers are expected to give traders time to think about what is causing the market to sell off, and react intelligently, instead of just selling indiscriminately. In the US, a 7% drop on the S&P 500 Index stops trading for 15 minutes. And a 20% decline would halt trading for the day.
In the wake of the China’s stock market crash over the summer, the circuit breakers appear to be a logical market reform to add order and control to extreme volatility.