Higher threshold is key to circuit breaker success, say experts

Following a turbulent week in Chinese markets, The TRADE speaks with UBS and Instinet about circuit breakers.

Circuit breakers are needed by the Chinese stock market, albeit with a higher threshold to ensure less erratic trading behaviour, according to UBS and Instinet. 

The role of circuit breakers became topic of the week amongst market participants when turmoil gripped Chinese markets after wild fluctuations in the CSI 300 Index. 

On Monday, the index fell by 5%, which triggered a 15 minute break, although continued, but on Thursday, the index fell by 7%, leading to trading lasting just 29 minutes. 

David Rabinowitz, head of direct execution services (Asia) at UBS, said investors start to panic as the index approaches the 7% threshold. 

He added: “… We more often than not see panic selling and paranoia. The authorities are concerned about creating a risk control that is too wide. On a volatile trading day in China, a relatively large number of securities already trade up to, or down to, the 10% daily limit.” 

Rabinowitz said authorities may well be reluctant to widen the daily limit or the circuit breaker thresholds, however. 

He explained: “Widening the circuit breaker threshold in accordance with this heightened intra-day volatility may suggest regulators are not doing enough to protect the interests of the dominant onshore retail investor base.”

Rabinowitz’s comments were echoed by Instinet’s head of execution trading in Asia ex-Japan, Neil McLean, who was speaking to The TRADE prior to the announcement that the circuit breaker mechanism would be suspended. 

He said: “It is important to have circuit breakers after the flash crash, but the 5% – 7% limit on Chinese stocks is too tight and is causing problems. 

“During the halt people are queuing up to complete as soon as possible. A 10% limit would provide more breathing space but the 10% limit on daily moves per stock in China make this worthless. If they could widen this to 15% then a 10% CSI300 halt would be much more relevant.” 

 • This story has been edited as an earlier version had attributed McLean’s comments to Nomura.  A spokesman for Nomura asked us to clarify that Nomura and Instinet are different entities and that McLean works for Instinet and not Nomura.