NSE may trigger circuit breaker to check stock market plunge

There are indications that the Nigerian Stock Exchange (NSE) may trigger its index circuit breaker if the stock market continues to plunge, in order to protect investors.
The market, which had started 2020 on positive note, gaining 7.5 per cent in the first month, has remained bearish since the second month, shedding 9.1 per cent.

The market dipped further by 1.2 per cent on the first trading day of March, pushing the Nigerian Stock Exchange (NSE) All-Share Index (ASI) below the 26,000 threshold to close at 25,816.57 on Monday. The year-to-date (YTD) decline stood at 3.8 per cent as at Monday, with apprehension of further fall in the days to come.

A leading investor disclosed  that given the free-fall the market was experiencing, the NSE might be convinced to trigger circuit breaker, which is a trading halt used to guard against sharp fluctuations on the market.

Circuit breakers were 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.
In 2016, the NSE amended its circuit breaker rule, saying it would 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 NSE had set the threshold at five per cent for the first trigger and a further five per cent for the second trigger in the same direction. According to the exchange, 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. “The exchange, through the index circuit breaker rule, seeks to promote just and equitable principles of trade, remove impediments to and improve the mechanism of a free and open