On August 5th, Caixin News Agency reported that due to the expectation of a US economic recession, the Asian market had a dismal start this week, and the Japanese stock market directly triggered the circuit breaker rule (SCB) of the CSI index futures in early trading. This is also the first time that the index futures have triggered circuit breakers since the consolidation of the Japanese derivatives market in March 2014.
The CSI index futures triggered SCB at 9:16am on Monday and resumed trading ten minutes later. Subsequently, during the midday trading session, the index futures were once again closed. Meanwhile, another benchmark index, the Nikkei 225 Index futures, experienced two circuit breakers today.
As of Monday's close, the Nikkei 225 index fell 12.4%, and the CSI index fell 12.23%.
Outside of the Japanese market, the South Korean stock market also experienced a sharp decline. South Korea's main stock index Kosdaq fell 8% today, triggering circuit breakers and suspending trading for up to 20 minutes.
The collapse of the Japanese and Korean markets today can be classified as "Black Monday" and has once again focused the market's attention on the alarming term of circuit breakers. It is worth mentioning that the circuit breaker in Japanese stocks may differ slightly from the commonly understood "American circuit breaker" among investors.
Overview of the Circuit Breaker System in the United States
A brief summary of the city wide circuit breaker system in the US stock market: Since 2014, when the benchmark index of the S&P 500 index reaches the price limit of 7% (above the closing price of the previous trading day), trading of all stocks in the market is suspended for 15 minutes; After the 7% first level circuit breaker suspension ends, if the S&P 500 index's rise or fall deepens to 13%, the second level circuit breaker will be triggered, and the entire market will be suspended from trading for another 15 minutes.
1、 If the secondary circuit breaker occurs after 15:25 Eastern Time, trading will not be suspended. But if the S&P 500 index drops by 20% within a day and triggers a level three circuit breaker, trading will immediately stop until the next trading day, regardless of when the circuit breaker occurs.
In addition to the city wide circuit breaker system triggered by the index, the US Securities and Exchange Commission also has circuit breaker regulations for individual US stocks
The limit up and limit down standards for S&P 500 index constituent stocks, Russell 1000 index constituent stocks, and other designated stocks are that a 5% increase or decrease within 5 minutes triggers a trading pause. If the trading price cannot return to the specified fluctuation range within 15 seconds, the pause time will be extended to 5 minutes.
The price limit for stocks with trading prices below $3 or low liquidity is 10% within 5 minutes. The reference price for the rise and fall of individual stocks is the closing price of the previous day.
The Kospi and Kosdaq indices in South Korea, the SET index in Thailand, and the Nifty and Sensex indices in India all implement circuit breakers based on previous closing prices, similar to the design in the United States, with only differences in specific values and circuit breaker duration.
Among them, the three-level thresholds for triggering circuit breakers in the South Korean index are 8%, 15%, and 20%, respectively. The suspension of trading for level one and two circuit breakers is 20 minutes, while level three circuit breakers trigger a full day trading halt.
Some markets also use "reference prices" to implement price limits. If Singapore imposes a limit of ± 10% on the latest trading price of a designated stock within 5 minutes, and this limit is exceeded, the stock will enter a cooling off period lasting for 5 minutes. During the cooling off period, trading will not stop, but the bidding range is limited to ± 10%.
Overall, the global circuit breaker system is divided into two camps on whether to suspend trading. At this point, Japan belongs to the category of suspended trading, but its specific design is much more complex than that of countries such as the United States.
Japanese stock circuit breaker rules
There is no city wide circuit breaker for stock indices in the Japanese market. The Japan Exchange Group only suspends trading of related futures, options, and other derivatives, and each product has its own unique circuit breaker rules.
Taking the Dongzheng Index futures that triggered circuit breakers on Monday as an example, the circuit breaker thresholds for levels one, two, and three are 8%, 12%, and 20%, respectively. If the main month is traded at the upper (lower) limit of the price range, then all futures contract trading for that month will be suspended for more than 10 minutes.
The benchmark price for price fluctuations is not simply the previous day's closing price or the latest price 5 minutes ago, but a benchmark price uniformly set by the Japan Stock Exchange Group. The specific rules are as follows:
The circuit breaker design in Japan means that the index itself will not experience a circuit breaker, and as long as the relevant stocks do not trigger the circuit breaker rule, they will not be suspended from trading due to the volatility of the index.
However, Japan's regulations on individual stock circuit breakers are very complex and detailed, and it is almost impossible for a large number of stocks to be simultaneously liquidated, thus ensuring the continuity of trading in the Japanese stock market.
But this design also means that the volatility of the index cannot be suppressed by suspending stock trading, only by allowing derivatives to reverse the rise and fall of the market. Under the state of panic, its effectiveness may be greatly reduced, resulting in a tragic situation where the index falls sharply at the front and derivative trading continues to circuit out later. The Eastern Stock Exchange and Nikkei Index seem to confirm this result today.