NEW YORK. — China suspended its experiment with circuit breakers last Thursday amid fears that the safety nets, common in the US, had exacerbated its stock market declines.
But the circuit breakers weren’t the problem — it was the way they were implemented, experts say.
And with no circuit breakers to protect against massive losses, some experts fear China’s stock woes could worsen.
“I am fairly concerned that they have gone from one extreme to another,” said Bart Chilton, a former commissioner with the Commodity Futures Trading Commission.
“The worst may not be over,” said Chilton, a senior policy advisor with law firm DLA Piper.
China unleashed its brand new circuit breakers, which seek to protect against erratic trading, on Monday, January 4.
Four days later, on January 7, the China Securities Regulatory Commission lifted the safeguard after trading was shuttered within 30 minutes of Thursday’s market open in the second closure of the week.
The experiment went south for several reasons, starting with they way it was designed.
China’s circuit breakers triggered 15-minute trading halts with any 5 percent swing in a benchmark of stocks listed in Shanghai and Shenzhen.
A 7 percent decline and trading was closed for the entire day.
In the US, by contrast, a 7 percent swing leads to a 15-minute halt.
Trading is only shuttered following a 20 percent decline.
Plus, there’s another 15-minute speed bump in between, triggered by a 13 percent swing.
Exacerbating Chinese investors’ anxiety was that such easily triggered circuit breakers were put in place just in time for the end to a six-month ban on sales by large investors, which was expected to lift as soon as Friday, January 8.
The combination of the two events had investors panicking over being trampled by the herd.
China “set the controls too tight,” said Bill Witherell, chief global economist with Cumberland Advisor, a $2 billion money management firm.
This created “an incentive for anyone thinking of selling to jump in and sell right away so they won’t get shut out”.
China’s regulators should have modified their circuit breakers to account for wider swings, Witherell said.
“Their removing the threshold (in China) is concerning,” said Sayena Mostowfi, who has done research on circuit breakers for TABB Group.
“Having said that, it’s not as if the US has the perfect numbers,” said Mostowfi, TABB’s head of equity research.
Indeed, US regulators just redid the nation’s circuit-breaker levels in 2012 amid fears that the old ones failed to prevent the 2010 Flash Crash, which saw hundreds of billions of dollars in stock losses before inexplicably recovering minutes later. — USA Today.