China is putting a stop to halts.
European Pressphoto Agency
A lamp production line in China’s Sichuan province.
China’s securities regulator will suspend new market circuit breakers, as of Friday, because they are not working to calm spikes up or down in Chinese equities. Observers say that China’s rules violate some basic principles, and thus bring panic: what may be needed is a wider gap between selloff thresholds that trigger halts.
As designed, China’s system stopped trading for 15 minutes with a 5% move in the CSI 300 index of blue-chip stocks, and stopped trading for the day after a 7% drop. The latter threshold arrived after 14 minutes of trading Thursday, to the apparent surprise of regulators.
Indeed, the system did nothing to stop China’s stock market selloff this week. The iShares China Large-Cap exchange-traded fund (FXI) is down nearly 9% this week, and has tumbled 3% today. The iShares MSCI Emerging Markets ETF (EEM) is down nearly 7% this week. Fragile currencies in emerging markets, including the Russian ruble, South African rand and Turkish lira, tumbled after China’s market closed after just minutes of trading Thursday, due to circuit breakers. In recent trading, the currencies were mixed. The Market Vectors Russia ETF (RSX) was down 3.5% in midday trading, the iShares MSCI Turkey ETF (TUR) was up 0.4%. The iShares MSCI South Africa ETF (EZA) was down 4% and the iShares MSCI Emerging Markets ETF was down 2.6%.
In 2012 the U.S. Securities and Exchange Commission approved a “Limit Up-Limit Down” mechanism for individual stocks. As for the whole market, according to the SEC:
“Market-wide circuit breakers provide for cross-market trading halts during a severe market decline as measured by a single-day decrease in the S&P 500 Index. A cross-market trading halt can be triggered at three circuit breaker thresholds—7% (Level 1), 13% (Level 2), and 20% (Level 3).”
In China, circuit breaker rules called for the following, according to The Wall Street Journal:
“A 5% move up or down in the CSI 300 Index, a gauge of 300 stocks listed in Shanghai and Shenzhen, will trigger a 15-minute trading halt, according to a stock-exchange statement Friday. A movement of at least 7% will freeze trading for the rest of the day.
