NSE releases interpretative guidance on index circuit breakers’ rule

Chioma Obinagwam

As part of efforts to check volatility in the Nigerian Bourse, the Nigerian Stock Exchange (NSE) has released interpretative guidelines on index circuit breaker rules.

According to the NSE, Circuit breakers are trading halts used by Exchanges to guard against sharp fluctuations on the market.

They, it added, are designed to give the market an opportunity to take a break and adjust to all available information before re-opening the market.

” They provide protection against excessive volatility during continuous trading sessions of the market. Circuit breakers provide the opportunity for greater information dissemination and assimilation to all market participants, including investors to facilitate better informed investment decision making during periods of high market volatility,” it said.

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“On The Nigerian Stock Exchange (The Exchange) circuit breakers will be triggered during periods of extraordinary volatility in the equities market in order to maintain an orderly market, and to allow liquidity to re-aggregate. The purpose is to dampen extraordinary volatility swings on market prices by providing time to restore equilibrium between buyers and sellers. It has the objective of dampening both market upswings and market downswings, and will complement the price limits on individual stocks already in place,” it continued.

The Exchange, noted that through the Index Circuit Breaker Rule, it seeks to promote just and equitable principles of trade, remove impediments to and improve the mechanism of a free and open market; and protect investors and the public interest.

The circuit breaker threshold , the bourse indicated, will be set by the Exchange from time to time.

“The Exchange has determined to set the threshold at 5 per cent for the first trigger and a further 5 per cent for the second trigger in the same direction.

Adding, it stated, that in the event of extraordinary market volatility, that is, anytime there is a 5 per cent market-wide rise or decline (Extraordinary Market move) in the value of the NSE All-Share Index (ASI) from its closing value on the immediately preceding trading day, the circuit breaker will be triggered, bringing about a trading halt in all equities listed on The Exchange, for a period of thirty (30) minutes.

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It added that 15 minutes into the halt, there will be a communication release from The Exchange that the market will re-open in another 15 minutes with continuous trading.

Given the highly-automated nature of today’s markets and improvements in connectivity,

a trading halt of 30 minutes is sufficient to allow market participants an opportunity to assess a serious market rise or decline and express their trading interest, with relatively little disruption to the market.

Trading halts, it disclosed,  will only occur in the event that the ASI breaches the 5 per cent movement threshold in either direction between 10:15 am and 13:45 pm during a trading day.

“Trading will not be halted if an Extraordinary Market move occurs after 13:45 pm. In addition, The Exchange will halt and reopen trading based on an Extraordinary Market move only once per trading day,” it stated.

It is expected that a trading halt will be a relatively rare event that will address extraordinary market rises or declines, and enable stabilization in the market.

Nevertheless, the Nigerian bourse also noted that trading halts will not affect the clearing, settlement and depository operations for matched trades, which will function as normal.