NSE May Trigger Circuit Breaker to Check Stock Market Plunge


Goddy Egene
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 told THISDAY 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 market; and protect investors and the public interest,” the exchanged had explained.

The prominent investor told THISDAY that his association was making moves towards the possibility of the exchange triggering the circuit breaker if the market continues to plunge.
“We are making some consultations to see how the market can be stabilised. We are shall be talking to the exchange on this and if the need arises, the circuit breaker could be used to bring back stability to the market,” the investor said.

A stockbroker and Managing Director of Network Capital Limited, Mr. Oluropo Dada, had said the decline in the oil price was raising fears of possible devaluation of the naira, a development he said was making some investors to take flight to safety.

“The $52 per barrel of the price of oil in the international market is disturbing against the background that our budget is predicated on $57 per barrel.
“The implication of this is that if the trend continues, devaluation of the naira may become a reality. In this circumstance, every investor will be looking for a safety net which the stock market does not appear to guarantee for now. However, the market is capable of correcting itself and the losses will be regained,” Dada said.

Similarly, a Senior Equity Research Analyst at Cordros Capital, Mustapha Wahab, said weak earnings releases were concern for many investors and contributing to the bear run.
“The continued tight string of the CBN on banks remained a cause for concern for investors. That is why both domestic and foreign investors are now keeping naira risk assets at arm’s length. Irrespective of the liquidity in the system, we suspect that most portfolio managers will continue to seek safety before return and until we see market-friendly policies from the federal government, we don’t not think the bears are done,” Wahab had said.