Authorities at the Nigerian Exchange (NGX) have explained that they installed automatic shut-down devices on its automated trading engine in order to protect investors and allow for efficient decision making in the event of extremely volatile trading pattern.
The automatic shut-down devices, otherwise known as circuit breakers, are set to automatically halt trading at the Exchange when the pricing trend reaches pre-determined threshold, both on the upward and downside.
The NGX held a webinar yesterday to enlighten investors and stakeholders on the rationales and impact of its index circuit breaker. The webinar was themed, “Role and Impact of Index Circuit Breakers in the Capital Market”.
Divisional Head, Capital Markets, Nigerian Exchange (NGX) , Mr. Jude Chiemeka, said the circuit breakers play significant role in capital markets operations by helping to curb panic-selling on stock exchanges, halt trading in event of adverse volatility when prices of securities rapidly move outside of pre-determined bounds and instill investor confidence in the market.
He said the circuit breakers were part of Exchange’s commitment to positioning the capital market as a global investment destination for stakeholders.
According to him, as an agile exchange, NGX is committed to enhancing the competitiveness of the capital market as a global investment destination by continually educating market operators, investors and other stakeholders about the design and benefits of its systems such as the index circuit breakers.
He pointed at the unprecedented event of November 12, 2020 when the NGX Index Circuit Breaker was triggered for the first time since its introduction in 2016.
Financial Economists, World Federation of Exchanges (WFE), Kaitao Lin, in his presentation, said circuit breakers can achieve an improvement in market quality, such as a reduction in volatility, an increase in liquidity, or a more efficient price discovery.
“However, circuit breakers often do not have any significant impact on prices as they do not stop a fall in prices,” Lin said.
Kelvin Piccoli of the Office of International Affairs, Commodity Futures Trading Commission, USA, said questions about the circuit breaker and market quality can be addressed using a theoretical market approach and econometrics event studies.
According to him, the theoretical market microstructure model examines how information shocks affect liquidity, price formation or agent behaviour in the presence of circuit breakers while the econometric event studies test the impact of circuit breakers on trading patterns and market variables.
Former Vice President, Research CBOE Holdings Inc,Chicago, William Speth while making presentations during the webinar, showed data investigating the four market-wide trading halts in USA during March 2020 and provided model recommendations to NGX.