In ensuring price stability in the Nigerian stock market, the circuit breaker has been introduced to moderate the volatility in the market.
Nigerian Exchange Limited recently hosted capital market stakeholders to a circuit breaker webinar with the theme, ‘Role and Impact of Index Circuit Breakers in the Capital Market’, designed to increase awareness and enhance the understanding of NGX Circuit Breakers among stakeholders.
NGX Circuit Breaker webinar is consistent with the Exchange’s commitment to providing avenues for engagement on its various products and services, with the aim to enhance stakeholders’ knowledge and deepen capital market activities.
Capital markets continue to be impacted by economic headwinds; leading to volatility that if not checked could adversely affect the market. Accordingly, circuit breakers are designed to ease any unusual volatility in the market that may cause investors to panic.
Recall the NGX Index Circuit Breaker was triggered for the first time on 12 November 2020, when the All-Share Index surged beyond the five per cent threshold, since its introduction in 2016.
The Nigerian stock market performance so far this year has been impressive despite volatility seen. As at September 15, 2022, the Nigerian Exchange All-Share Index rose by 16 per cent, while market capitalisation gained by N4.430 trillion.
According to NGX, the webinar served as a platform for receiving information on certain procedures to follow after the first and second trigger of the circuit breakers.
Circuit breakers are trading halts used by exchanges to guard against sharp fluctuations in the market and are designed to give the market an opportunity to take a break and adjust to all available information before re-opening the market. Once a circuit breaker is applied, no order can be placed until the trading resumes. However, existing orders can be withdrawn or cancelled but cannot be modified. Trading halts will not affect the clearing, settlement and depository operations for matched trades, which will function as normal.
Stock exchanges around the world introduce circuit breakers to maintain sanity in the market and to ensure that a particular stock does not go uncontrollably to one direction. Whenever the price of a stock increases or declines beyond a specified threshold it is said to have entered into a circuit. So, the circuit breaker is needed to halt the unwarranted movement.
Individual stocks have their own circuit limit, which could be five per cent, 10 per cent, 15 per cent or 20 per cent, which are decided by exchanges. If circuit breakers of individual stocks are hit, their trading is not halted, but further price movement is not allowed for that day in the stock. So, circuit breakers cap the limit of movement preventing too much loss / malicious activity in a stock.
Analysts observed that if a market is spirally out of control and the reasons have become very difficult to identified or understand other than perhaps irrational behaviour on the part of investors, then it is important for the intervention in every market in the world as to give room for the irrational behaviour to be reconsider and done away with for investors to become rational again in their investment thinking.
Speaking the CEO Highcap Securities Limited, Mr David Adonri said, the index circuit breaker rule is applied in various market in the world and if a market is spirally out of controlled, it becomes extremely volatile, and the exchange would need intervene to stop trading in order to enable the market become a little bit rational within the period.
The chief operating officer of InvestData Consulting, Mr. Ambrose Omordion stated that “it is a device built into the trading system to monitor the All-Share Index either up or down, there is a level of appreciation or depreciation in a given day and if trading goes beyond that, it will alert everybody involved that is abnormal.”
Capital market analyst with Calyxt Securities Limited, Mr. Tunde Oyediran said, “Circuit breaker is an act of temporarily halting trading for a period of time in response to substantial drop in value of stocks.”
According to him, it is beneficial, if as a result of an unfavorable event that happens in the market triggers a significant free fall of stock prices or market index, for Nigerian market if ASI falls by five per cent in a day the breaker will be applied. It is to avoid further depletion of stocks in the market. It is also to give a break to the traders, to have a rethink or consult well with their clients. It is a kind of psychological thing.