PSE moves to manage market volatility

The Philippine Stock Exchange (PSE) seeks to better control extraordinary volatility at the local stock market, which entered the bearish cycle earlier this year, by shifting to a three-tier circuit breaker system that halts intraday trading at varying duration once certain thresholds are breached.

The three-level circuit breaker—duly approved by the Securities and Exchange Commission (SEC) “by way of emergency volatility-control in light of the COVID19 pandemic affecting markets globally”—will take effect on May 4, PSE president Ramon Monzon said in a memo­randum.

“We have seen unprecedented market volatility in reaction to uncertainties caused by the COVID-19 crisis. Our first step to address this volatility was to reduce the lower static threshold of securities from 50 percent to 30 percent. We followed this up with the addition of two circuit breaker levels to give the entire market a breather when these are triggered,” Monzon said in a statement on Thursday.

“The adjustments are emergency measures necessary to protect investors and maintain order in the market,” SEC Chair Emilio Aquino said. “These will enable the PSE to better manage extraordinary volatility arising from fears over the COVID-19 pandemic.”

The new system will have multiple circuit breaker triggers for declines in the benchmark index, PSE index, of 10 percent, 15 percent and 20 percent, resul­ting in a market-wide trading halt lasting 15 minutes, 30 minutes and 60 minutes, respectively.

This will replace the current system, an offshoot of the 2008 global financial crisis, which halts trading for 15 minutes once the PSEi declines by at least 10 percent once per trading session.

The previous single le­vel circuit breaker had been tripped four times since it was adopted in September 2008: On Oct. 27, 2008, and on March 12, 13 and 19 this year.

The new circuit breaker levels can only be triggered once per trading day. In case the higher level is breached first, the lower level circuit breaker will no longer be triggered on that trading day.

Notwithstanding a breach of the circuit breaker thres­holds, no market halt will be implemented if it will overlap with the five-minute continuous trading period prior to the preclose and trading-at-last phases of the trading day. For instance, trading will not be halted if the PSEi declines by 10 percent less than 20 minutes before preclose.

Level 1 circuit breaker can be triggered only 60 minutes up to 2:55 p.m. once the PSE returns to whole-day trading schedule.

Level 2 circuit-breaker can be triggered only up to 2:40 p.m. while level 3 can be triggered up to 2:10 p.m. only.

Under the current shortened trading schedule where preclose starts at 12:45 p.m., level 1 circuit-breaker can be triggered up to 12:25 p.m. only. Level 2 can be triggered up to 12:10 p.m. while level 3 can be triggered up to 11:40 a.m. only.

In conjunction with the three-stage circuit breaker mechanism, the SEC approved the implementation of a revised static threshold for all securities effective March 24 to better manage extraordinary volatility in the market.

Trading in a security will be suspended when its price falls by 30 percent below its previous closing price. The 50 percent ceiling will remain to allow stock prices to recover to their optimal level.

The lower static threshold or the floor price for each security was previously pegged at 50 percent below the reference price.