The circuit breaker rule of the Jamaica Stock Exchange (JSE) limits the rise or fall in price of each security within a trading day to 15%. On the rise, the 15% is based on the closing bid or last sale, whichever is higher and on the fall it is on the closing offer or last sale, whichever is lower but in both cases the referenced prices are those at the close of trading on the day immediately preceding the current trading day.

Stop loss rule

In 1993 the JSE index had its steepest drop ever in a year of 49.1%. Not surprisingly, the share price of several companies had significant one-day declines and so as to prevent a repeat of this the circuit breaker rule was subsequently instituted. However, over time the purpose of the rule has evolved to that of restricting price manipulation and since that was not its original intent the JSE should rescind the rule. 

With the market in its second year of decline, the rule has also created gridlock in the trading of one security. The 15% limit does not permit rounding to the nearest cent hence with a bid at $0.06 and offer at $0.07 and nowhere to go the stock is unable to trade.  The prospective buyer cannot hit the offer or the trade will be rejected. In that case a new bid can be placed at the $0.07 to facilitate the trade on the next trading day by which time the seller will likely increase the price of the offer.

Board lots

A board lot is defined as a standardized number of shares that makes a trading unit. This is certainly a better tool to control stock price manipulation than the circuit breaker. The number of board lots required to effect a price change could be based on the price of the security but sufficiently high to make attempts at price distortion very expensive.

A good starting point to determine a board lot is to look at the transaction cost involved in the trade of a unit of stock at different price levels. The objective here is that the gross sale of a board lot must be no less than the transaction cost incurred. A maximum of four ranges could then be selected and for each use the lower band to establish the number of board lots that must be traded to have a change in the price of the stock.

Circuit on the market

Although badly designed the circuit breaker rule does have its place. It should therefore be replaced with one at the level of the market that restricts movement of the main index to the said 15% within any trading day. Bear in mind that it is no business of the exchange to interfere in a purportedly “free market” where buyers and sellers interact to determine the price of a security, the exchange should do its part to encourage trading.