The circuit breaker method at the stock exchanges is applied to prevent extreme volatility in share prices, which destabilises the market
The Bangladesh Securities and Exchange Commission (BSEC) said it will impose a circuit breaker on new shares.
The circuit breaker method at the stock exchanges is applied to prevent extreme volatility in share prices, which destabilises the market.
At its 704th commission meeting held on Tuesday, the stock market regulator decided to respond to the proposal from the Dhaka Stock Exchange (DSE) to impose circuit breakers on the first day of trading for all new securities. This will come into effect once new share makes its debut in the stock market.
Price of a new security on the first trading session must be within a 50 percent range of its issue price. That means the shares of a newly listed company can neither be traded at a price higher or lower than 50 percent of the issue price.
Issue price refers to the price at which primary market investors buy securities through initial public offering.
Investors who get shares under different quotas tend to dump those at a higher rate during the debut as the secondary market price of newly listed shares usually remains high initially, read a BSEC press release.
That results to a gradual slump in newly listed shares, which negatively impacts the market indices. Consequently, the market loses its natural strength and pace, and the general investors are affected, observed the BSEC.
That is why, circuit breaker is imposed at debut which will help the market prevent overpricing and volatility as well, said BSEC officials.
The new 50 percent circuit breaker will be effective until the end of second trading session. After the first session's 50 percent circuit breaker based on issue price, the second session will pick the closing price of the first day as reference price, and over the second session price cannot go 50 percent higher or lower than it.
The third session will see a regular circuit breaker system by the stock exchanges.
Initially, there was a circuit breaker system in both the stock exchanges under which price of a share or unit of funds or bonds was allowed to increase or decrease up to a certain change both in percentage and nominal scale. Newly listed securities were enjoying first five trading days as circuit breaker-free sessions.
In May 2015, as per an order of the BSEC, exchanges implemented the new circuit breaker system which only follows percentage scale. But the percentage is determined based on price slab of securities.
The slab-wise circuit breaker system allows maximum 10 percent price movement over a single session in cases of securities priced under Tk200 each.
If the price is above Tk200 and not more than Tk500, the allowed change limit is 8.5 percent, up to the price of Tk1,000, the circuit breaker is 7.5 percent, while 6.25 percent for prices up to Tk2,000, 5 percent up to Tk5,000 and 3.75 percent for the securities priced above Tk5,000 each.
At the same time, the number of circuit breaker-free trading days also had been reduced to two days from previous five days.
During days of corporate disclosures, no listed securities are subject to circuit breaker system.