INTRODUCTION

The Singapore Exchange (SGX) recently issued a consultation paper in June to seek public comment on its proposal to introduce dynamic circuit breakers on the Singapore Exchange Securities Trading Limited (SGX-ST) market. Corresponding amendments to the relevant SGX-ST Rules are also proposed, and are subject to regulatory concurrence by the MAS.

Circuit breakers seek to address sharp movements in the price of a traded instrument within a short period and give the market time to take stock of the situation. In this manner, circuit breakers serve as a safeguard against disorderly trading.

STATIC CIRCUIT BREAKERS

The SGX had first consulted the public in July 2011 on static circuit breakers. The circuit breaker model proposed then consisted of a price band determined at the start of the day using the opening price of a security. The width of the price band would be 10% in either direction from the opening price. If there were any potential trades outside of the band, the circuit breaker would trip and a cooling-off period of 5 minutes would be activated during which only trades within the price band could continue to be executed. At the end of the period, the circuit breaker would be adjusted based on the top or bottom limit of the price band depending on whether the triggering potential trade was above or below the price band respectively.

DYNAMIC CIRCUIT BREAKERS

After further consideration of the original model and the market feedback received, the SGX is now proposing a revised dynamic circuit breaker model, which is constantly updated to reflect intraday trading activity, for the following reasons:

  • A dynamic circuit breaker model will lead to the circuit breaker being more sensitive to sudden and sharp price movements in a short span of time, which suggest that trading may be tending towards disorderliness.
  • In addition, the circuit breaker is less likely to trip as a result of cumulative price movements which reflect prevailing market conditions, leading to fewer interruptions to normal trading.

The dynamic circuit breaker model will take the form of a price band that varies with movements in the traded price of an instrument throughout the day. When there are potential trades outside this price band, the dynamic circuit breaker will automatically trip and a cooling-off period will be activated, which will be broadcast to trading members and reflected on the SGX website. During the cooling-off period, trades can continue to be matched at or within the price band that is fixed for the duration of the cooling-off period. After the cooling-off period, normal trading resumes and the price band re-adjusts to reflect price changes in the instrument.

The dynamic circuit breaker model will also bring the SGX in line with international best practice, with the SGX noting that such circuit breakers are a feature of stock exchanges in Australia, the United Kingdom and the United States of America.

PROPOSED TIMELINE

Subject to regulatory approval and industry readiness, the SGX expects to introduce dynamic circuit breakers by the year-end.