SGX To Introduce Circuit Breakers Early Next Year

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According to a report by Bloomberg, Singapore Exchange, operator of the Mainboard and Catalist stock exchanges here in Singapore, has “plans to add circuit breakers early next year”, subject to regulatory approvals.

The move comes after a recent episode of a particularly dramatic collapse in share prices for three companies, namely Asiasons Capital, Blumont Group (SGX: A33), and LionGold Corp (SGX: A78).

At the close of trading on 8 Oct 2013, the three shares dropped 96%, 94%, and 87% respectively from their closing prices on the previous Thursday. In total, around S$6.9b was wiped off the market value of the companies in three trading days.

SGX had sought public feedback for the plan back in June, and according to its proposal, the dynamic circuit breaker “comprises of a price band of +/- 10% of the price of an instrument. The price band will therefore adjust as the traded price of the instrument changes. Should a trade attempt to be executed at a price outside the price band, the circuit breaker will trip and a 5-minute cooling-off period will be activated.”

The company added, “During the cooling-off period, market participants can continue to trade within the price band, which will remain constant throughout the cooling-off period.”

In other words, trades that will cause sharp movements of 10% in either direction in a share can’t be made as the circuit breaker will trip.

Bloomberg went on to cite Kelly Teoh, a strategist at IG Asia Pte, who said that the circuit breakers “should help minimize market manipulation.”

So yes, SGX’s move to introduce circuit breakers to the stock exchanges it controls would possibly reduce volatility in the markets and prevent shady practices such as price manipulations. But if you’re an investor, is this really that important?

Morgan Housel from The Motley Fool USA once wrote (emphasis his):

A company’s value lies in its assets, its people, its brand, and ultimately, its ability to generate cash flow. Its stock price is completely removed from these details, especially on a minute-to-minute basis… when you buy a stock you are buying an actual business with actual assets run by actual people, not a digital ticker tape.

As fellow Fool Ron Gross says, it’s not a stock market, it’s a company market.”

A circuit breaker introduced by SGX could help prevent a sharp 10% intra-day correction in the shares of say, DBS Group Holdings (SGX: D05), a company with one of the largest weightings in the benchmark Straits Times Index (SGX: ^STI). But if the bank is going around making bad loans, buying up risky assets, and leveraging its balance sheet to the hilt, no amount of circuit-breaking can save its shareholders from making permanent losses over the long-term as its banking-business crumbles.

A circuit breaker, despite offering protection for investors from fat-fingered trades, computer glitches, or price manipulations, cannot really save anyone from making sustained losses in the stock market.

Only the realisation that we are effectively business owners when we own a stock can.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.