CSE to continue 10% closures despite mixed reviews

By Charindra Chandrasena

The Securities and Exchange Commission of Sri Lanka (SEC), which regulates the Colombo Stock Exchange (CSE), will continue to allow the market to be closed for the day if the S&P SL20 index drops by 10% or more, The Morning Business learns.

Market sources told us that the SEC has advised CSE to proceed with the new circuit breaker system and assess how the market reacts today, after which any changes could be considered if necessary. The new system automatically halts trading and closes the market for the day if and when the S&P falls 10%.

When contacted for confirmation yesterday (11) evening, an SEC spokesperson told The Morning Business that no decision had been made thus far to amend or discontinue the new system.

Yesterday (11) was the first time this system was seen in operation. It resulted in what is believed by seasoned CSE stakeholders to be the shortest trading day in CSE history, with the market being halted and subsequently closed for the day approximately 30 t0 40 seconds after the commencement of trading.

Under the previous system, trading was halted every time the S&P SL20 index of the 20 largest listed companies dropped by 5%, with the market closing for the day if it dropped 5% at or after 2 p.m. The new system did away with the 2 p.m. mark, allowing the market to be closed as early as 11.30 a.m. if the S&P SL20 index drops by 10% or more.

However, the new circuit breaker received some criticism yesterday from stockbrokers and investors. Prominent investor and NP Capital Ltd. Chairman Nimal Perera took to Twitter to criticise the new system, saying the SEC should consider the volumes traded and the duration for implementing the circuit breaker.

“My opinion is SEC should reconsider this Circuit Breaker methodology at CSE. It should be given an adequate time period to decide the market direction. Otherwise we can see similar situation everyday (sic),” he said.

Several stockbrokers, speaking to The Morning Business on the condition of anonymity, also said the circuit breaker being set to close the market at a 10% drop in the S&P is not ideal. They opined that it creates panic and impulsive selling among investors due to the extremely brief trading periods and also prolongs the bad run of the market by having such brief trading days.

However, First Capital Holdings PLC Head of Research Dimantha Mathew said the new circuit breaker should be persisted with as these are an exceptional couple of days where the selling pressure created over the seven-week closure of the market is being released, adding that once this pressure eases, the market would not see such drastic drops of 10% or more.

The SEC introduced the new Three-Tiered Circuit Breaker structure on 30 April in preparation for the reopening of the CSE after a prolonged closure.

(i) First Circuit Breaker – after the commencement of trading of the CSE for the day, a Market Halt to be imposed for 30 minutes in the event the S&P SL20 index drops by 5%.

(ii) Second Circuit Breaker – having re-commenced trading after the cooling off period of 30 minutes following the S&P SL20 drop of 5%, if the S&P SL20 index drops again by another 2.5%, a Market Halt to be imposed for another 30 minutes.

(iii) Third Circuit Breaker – upon re-commencing trading subsequent to cooling off period of 30 minutes following the S&P SL20 drop of 2.5% (altogether S&P SL20 has dropped by 7.5%), if the S&P SL20 index drops by a further 2.5% (S&P SL20 index has fallen altogether by 10% for the day), trading will be halted and the market shall be closed for the day.

The SEC at the time said it deemed it necessary to amend the previous methodology by introducing a Three-Tiered Circuit Breaker structure, having taken into consideration the “prevailing market conditions”.

“Accordingly, a Three-Tiered Circuit Breaker structure is hereby introduced in order to strengthen the capital market and ensure that precautionary measures are in place to eradicate distortion in the S&P SL20 Index by providing a layered approach,” it said in a statement.

It directed the CSE to implement the Three-Tiered Circuit Breaker structure from the date the market re-opens and said it shall remain in force until further notice.