THE ANALYSTS: Time to review the circuit breaker rule
The Jamaica Stock Exchange’s circuit breaker rule has again come under heavy fire in recent weeks, with some investors calling for the rule to be abolished and have trading flow without interruptions
However, the Analysts of Taking Stock with Kalilah Reynolds say the rule is useful, but should be reviewed and updated.
The JSE’s circuit breaker ensures that no stock trades more than 15 percent above or below its effective close price. The effective close price is determined whenever the closing bid is greater than the close price or whenever the closing ask is less than the close price.
If the stock rises or falls below the predetermined amount then trading is halted for an hour to allow for a cooling off period before resuming.
Founder of Stocks on the Rocks, Simon Johnson, said the circuit breaker rule was implemented to help prevent extreme volatility in stocks which could have a ripple effect on other systems.
“The fear from some is that, yes it’s amazing when something goes up by 300 percent, but if it can go down by that much then it can really cause great stress on financial systems and that hurts everybody,” he said.
He noted however, that as markets evolve, the needs of a circuit breaker may also evolve.
“There is a reason why circuit breakers were put in place but certainly we can take a look at it and see how the market has evolved to see if it is now meeting the objectives that it was intended to achieve,” Johnson said.
Similarly, avid investor Shanice Williams said that in order for the JSE to fully compete with international markets, the circuit breaker rule needs to be reviewed.
“Circuit breakers in the more advanced markets work a lot more differently than ours. If you’re trading on an international market, there is a circuit breaker that protects stocks from falling but a stock can actually trade up as far as it can,” she explained.
She also noted that on some international markets, once stocks hit their circuit breaker, trading is only halted for 10-15 minutes.
“We halt for an hour, in a market that only opens for 4 hours. So, our circuit breaker, I don’t think it should be abolished but how it’s set up puts us at a disadvantage to a lot of the international markets,” she said.
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