Circuit breakers - on the equity markets - July 2006
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Circuit breakers
- on the equity markets
Consultation paper
July 2006
This consultation paper is written by OMX The Nordic Exchange, Oslo Børs and Iceland Stock
Exchange and is sent to all members of these exchanges.Executive summary......................................................................................................... 3
Background.................................................................................................................... 4
Introduction to circuit breakers ......................................................................................... 5
Static price range ....................................................................................................................... 5
Dynamic price range ................................................................................................................... 5
Volatility interruptions during continuous trading ............................................................................ 6
Volatility interruptions during call auctions..................................................................................... 6
Benchmark .................................................................................................................... 7
Deutsche Börse .......................................................................................................................... 7
London Stock Exchange .............................................................................................................. 7
Euronext ................................................................................................................................... 8
SWX Swiss Exchange .................................................................................................................. 8
Borsa Italiana ............................................................................................................................ 8
Irish Stock Exchange .................................................................................................................. 8
Other benchmarks ...................................................................................................................... 9
Current practise at OMX, Oslo Børs and Iceland Stock Exchange ............................................ 9
OMX Copenhagen ....................................................................................................................... 9
OMX Stockholm........................................................................................................................ 10
OMX Helsinki ........................................................................................................................... 10
Oslo Børs................................................................................................................................. 10
ICEX ....................................................................................................................................... 11
Academic testimony .......................................................................................................11
Proposal for circuit breakers and trading safeguards............................................................13
Reference prices....................................................................................................................... 13
Stages in and length of the interruption ...................................................................................... 13
Segmentation .......................................................................................................................... 14
Width of price ranges ................................................................................................................ 14
Penny shares ........................................................................................................................... 15
Fast markets............................................................................................................................ 16
Publication of the static and dynamic range ................................................................................. 16
When circuit breakers are triggered ............................................................................................ 16
Trading safeguards ................................................................................................................... 17
Forced cancellation of trades...................................................................................................... 17
Effects on the markets....................................................................................................18
OMX ....................................................................................................................................... 18
ICEX ....................................................................................................................................... 18
Questionnaire................................................................................................................20
2(22)Executive summary
OMX The Nordic Exchange, Oslo Børs and Iceland Stock Exchange are proposing to implement
circuit breakers and trading safeguards on the equity markets in the SAXESS trading system.
A circuit breaker interrupts matching when the price movements in a security become relatively
large. The purpose is usually to give the market participants a few minutes to evaluate any new
information, reconsider their interests or remove any erroneous orders. We propose to implement
circuit breakers in September 2007.
A circuit breaker has two types of reference prices: a static price and a dynamic price. The static
reference price is the last auction price and the dynamic price is the last traded price. If an incoming
order would result in a trade that deviate sufficiently from the reference price it will trigger a circuit
breaker. When a circuit breaker is triggered the system will change the state of the order book to pre-
call for 30 seconds followed by an auction state for three minutes plus random zero to 30 seconds. If
the new equilibrium price is outside the static price range the auction state will be extended for 90
seconds plus random zero to 30 seconds.
OMX proposes the following price ranges:
A static range of:
• 10% for blue chip and investment funds/ETFs
• 15% for other shares and First North
• 40% for penny shares
A dynamic range of:
• 2% for blue chip and investment funds/ETFs
• 5% for other shares and First North
• 20% for penny shares
Oslo Børs proposes the following price ranges:
Oslo Børs also proposes the suggestions and limits stated in the OMX proposal. However since there
has not been made a study on the effects on the Oslo market, Oslo Børs reserves the right to change
these limits after such a study has been made.
Iceland Stock Exchange (ICEX) proposes the following price ranges:
ICEX propose only to use a dynamic price range of:
• 5% for blue chip (ICEX15)
• 25% for other shares
Furthermore OMX, Oslo Børs and ICEX propose to implement trading safeguards to use
simultaneously with circuit breakers. Safeguards can be implemented in May 2007 or maybe already
as of September 2006. A safeguard rejects orders that deviate significantly from a reference price
from entering the order book. As reference price we will use the last traded price. Compared to
circuit breakers the price range for safeguards will be wider and the purpose of safeguards is
primarily to avoid erroneous order entries. The price ranges for trading safeguards have not yet been
decided.
3(22)Background
Sometimes stock markets experience sudden drops or increases of a share price that can be difficult
to explain. Other times a price movement is caused by a company announcement. Nevertheless,
when volatility increases, the market will experience increased uncertainty as well.
Several incidents have emerged since Black Monday in October 1987 – not least in the last couple of
years – where the prices in the order books have made large jumps causing a lot of problems and
uncertainty. For example, in December 2005 on the exchange in Tokyo, Japan, an erroneous trade
had big consequences for a member and for the market as a whole. The incident led to increased
trading activity and uncertainty, and had a major impact on the price and volume which caused a
system breakdown. The overall trust and confidence to the market was weakened.
The reason for these incidents can be sudden changes in expectations to a share price or it may be
caused by manual erroneous order entries. These sudden and significant price movements may
trigger stop loss orders and other algorithmic trading that can have a negative impact on the price
stability.
Stop loss orders are not an order type offered by the SAXESS trading system but is a facility offered
by some members to end clients. When the price drops to a pre-determined level, the stop loss order
is automatically triggered “in-house” and entered into SAXESS as an ordinary limit order. Stop loss
orders are generally not a problem but they can cause a problem specifically in cases were the order
book is not very liquid or when triggered by erroneous trades. Furthermore stop loss orders can start
a chain reaction where one order moves the price further down and then triggers other stop loss
orders. When this happens the price may recover but after a period of uncertainty.
Also algorithmic trading that is triggered by arbitrage between A and B shares, warrants, index
arbitrage etc. can influence the volatility. This type of behaviour may have a negative impact on the
credibility of the market and may have economic impact on the market participants.
The volume of algorithmic trading, black box trading, special order types like stop loss orders and
arbitrage trading is increasing on all the exchanges. The amount of trades of these types is expected
to escalate if no further actions are taken.
A step to decrease the uncertainty is to implement circuit breakers – a standard functionality on
several European stock exchanges today.
4(22)Introduction to circuit breakers
The general idea is to establish a reference price in all order books and then allow trades that have
been matched at a price within a pre determined range from the reference price. The setting and
methodology of the reference price is crucial to achieve the desired effect.
A circuit breaker interrupts matching when the price movements in a security become relatively
large. The purpose is usually to give the market participants a few minutes to evaluate any new
information, reconsider their interests or remove any erroneous orders that might have triggered the
interruption. Often the matching interruption ends with a call auction so that the market determines a
new price level for the relevant security. The boundaries for price movements that trigger a circuit
breaker are usually measured in two different ways:
a) A static price range
b) A dynamic price range
Maximum price deviation
Opening Static price Dynamic
call price range price range
price
Latest
traded price
Opening call Continuous trading Closing call
Closing Closing
Price t-1 call price
Static price range
The static price range is determined by a predetermined range (e.g. 10%) around a reference price in
each order book. For the static price range the last auction price is usually used as the reference
price. In the opening auction the closing price from the previous day is used as a reference price for
the static price range. During continuous trading the opening call price is used as reference price. If
there is any call auction during the day, this will determine a new reference price. The static price
range can be active both during call auctions and continuous trading. This circuit breaker is usually
triggered by relatively large price movements over the trading day.
Dynamic price range
The dynamic price range is determined by a predetermined range (e.g. 5%) around a reference price
in each order book. In contradiction to the static price range the reference price in a dynamic price
range is usually determined by the last trade in the order book. Hence it is continuously updated
5(22)during continuous trading and even by call auctions. The dynamic price range is narrower than the
static price range. The dynamic price range is only active during continuous trading – hence not
during call auctions. This circuit breaker is triggered by relatively big price movements from one
trade to the next.
Volatility interruptions during continuous trading
The continuous trading is interrupted by a volatility interruption whenever the potential execution
price of an order lies outside the dynamic and/or the static price range. Incoming orders are partially
executed until the next potential execution price leaves the corridor. A volatility interruption triggers
a change in trading form (state): from continuous trading to pre-call followed by a call auction.
Any un-executed part of a limit order triggering a circuit breaker will be carried on and added to the
order book in the auction state.
‘Fill or kill’ orders can not trigger a circuit breaker. If the price of a ‘fill or kill’ order is out side the
price range it will be rejected in full and hence not have any influence on the continuous trading.
Volatility interruptions during call auctions
A volatility interruption during call auctions is initiated if the indicative auction price is outside the
static price range. This initiates a limited extension of the call phase allowing market participants to
enter new orders as well as to modify or delete orders in the order book.
6(22)Benchmark
The benchmark analysis covers: Deutsche Börse, London Stock Exchange, Euronext, Swiss
Exchange, Borsa Italiana and Irish Stock Exchange.
Thresholds Thresholds Duration
Static price Dynamic price Halt/auction
Exchange Price range Reference Price range Reference
price price
Deutsche Not published Last auction Not published Last traded Interruption for 2
Börse price price minutes
London - - +/- 5 % Last traded Interruption for 5
Stock +/- 25 % price minutes
Exchange
Euronext +/- 10 % Last auction +/- 2 % Last traded Interruption for 4
price +/- 5 % price minutes
Swiss - - +/- 2 % Last traded Interruption 15
Exchange +/- 25 % price minutes
(5 minutes)
Borsa +/- 10 % +/- 5 % Weighted Interruption for 5
Italiana average price minutes
Irish Stock +/- 6 or 12% Last auction +/- 3 or 6% +/- Last traded Minimum duration
1)
Exchange +/- 20 or 24% price 10 or 12% 1) price
1)
See Market Model for the Electronic Trading System of the Irish Stock Exchange: ISE Xetra®
Deutsche Börse
The Xetra trading system contains circuit breakers that are volatility interruptions and can be
initiated by deviation from a static or a dynamic price range. The thresholds for the reference prices
are not published.
When a sufficient price movement triggers a circuit breaker the trading state changes directly from
continuous trading to an auction state. No halt is initiated and iceberg orders participate in the
auction with their full volume. The call phase ends randomly, but if the new auction price is outside
the previous price range the auction is extended until the volatility interruption is terminated
manually. The call phase can only be extended once.
London Stock Exchange
London Stock Exchange has implemented price monitoring which triggers a temporary suspension
of order book trading when prices move beyond defined thresholds.
If the price tolerance levels are reached or breached during continuous trading the trading will be
suspended and an Automatic Execution Suspension Period (‘AESP’) will occur resulting in an intra-
day auction. The auction call will last for five minutes with random end periods.
7(22)The reference price at London Stock Exchange is the last paid price generated automatically in the
system. The reference price can also be set manually if required. The reference price at the start of
each trading day is set as the last automatically executed trade – normally the closing price from the
previous day.
London Stock Exchange is only using a dynamic reference price and the price tolerance is set
dependant on the segment. For the most traded securities the threshold is 5% deviation from the
reference price and 25% for the less liquid.
If a fill or kill order is outside the reference price range the order is rejected and no interruption is
initiated.
Euronext
If circuit breakers are triggered they may cause a reservation or a warning if the price of an order is
deviating from the reference price range. The static reference price is the auction price or the closing
price for the previous trading day. The static price range is +/- 10%. The dynamic reference price is
re-adjusted during continuous trading and is set as the last automatic trade. The dynamic price range
is +/- 2% for the most traded shares and +/- 5% for all other shares.
During this interruption it is possible to delete orders, enter new orders and modify orders. The re-
opening of an order book is done by an auction.
SWX Swiss Exchange
Only a dynamic reference price is used. If the price deviates by 2% or more from the reference price
(last traded price), there will be an interruption of 15 minutes. During this break it is possible to
delete orders, enter new orders and modify orders. The order book opens in an auction and a new
reference price is calculated.
For shares with a price less than CHF 10 the allowed deviation is set to 25% which will lead to an
interruption of only 5 minutes. For foreign equities the allowed deviation is 2% or more, but the
break is only 5 minutes.
Borsa Italiana
There is an automatic control of the trading with a maximum variation of +/- 10% with respect to the
control price (static price) and a maximum variation of +/- 5% from the dynamic reference price.
The dynamic reference price is calculated as a weighted average price of the ten last per cent of the
quantity traded.
Irish Stock Exchange
Irish Stock Exchange has two types of interruptions to increase price stability: Volatility
interruptions that trigger a halt followed by an auction in an order book and market order
interruptions that reject orders in an auction.
8(22)The thresholds for the reference price are set according to a price range table. Penny shares have a
larger threshold than larger shares. Further, the shares are ordered into two liquidity classes. The
thresholds are in Euro cents for penny shares and with a percentage deviation for other shares
according to share price and liquidity.
When a circuit breaker is triggered an auction is set for a minimum duration and the auction ends
within a random period of time. If no new equilibrium price is set, the auction phase will be
extended until it is manually ended.
Other benchmarks
Some circuit breakers are triggered if an index falls by e.g. 10%. For example, if the Dow Jones
Industrial Average falls by 10%, the NYSE might halt market trading for one hour.
Current practise at OMX, Oslo Børs and Iceland Stock
Exchange
None of the OMX exchanges is currently using circuit breakers. OMX Helsinki uses safeguards
which prevent orders with strongly deviating prices to be entered in the order books. OMX
Stockholm, OMX Copenhagen and OMX Helsinki all have different practices for cancellation of
erroneous trades.
Market Surveillance at OMX is in continuous dialogue with the members to reduce risk of erroneous
trades. The members have been recommended to set up internal filters to catch orders with prices
strongly deviating from the market price.
Written guidelines for the OMX cancellation policies are expected to be published during the
summer 2006. The guidelines will be used for the Stockholm and Copenhagen markets. The
guidelines are based on the standard procedure for forced cancellation used in Stockholm and are in
line with Norex Member Rules 5.7.3.
OMX Copenhagen
OMX Copenhagen has a matching halt in an order book every time a potentially price sensitive
company announcement is received. After halting the relevant order book(s) the announcement is
immediately released to the market. The halt is for 5 minutes and gives the market participants time
to remove any orders they have in the affected order book(s). Furthermore they get time to assess the
consequences of the announcement for the price of the security. Since 25 April 2006 the matching
halt has been ending with a call auction of between 30 and 90 seconds.
During the matching halt new orders can not be placed and existing orders can not be changed.
However it is possible to delete orders. During the auction phase it is also possible to place new
orders and change existing orders. The auction is an open auction, where the accumulated volumes
at the five best price levels are visible – market by level. This also includes hidden volumes – so-
called iceberg orders. To avoid disclosure of orders with a hidden volume, dealers may, when
placing an order, decide that the order shall be valid until the start of “next call”.
9(22)Trades executed outside Saxess – manual trades or off-exchange trades – may be reported as usually
during the matching halt.
As a consequence of the Transparency Directive OMX Copenhagen might not be able to uphold the
use of matching halt after company announcements. The Transparency Directive will enter into
effect in January 2007.
OMX Stockholm
OMX Stockholm has been using forced cancellation since late 90’s, so that Market Surveillance can
forcibly cancel erroneous trades. This way the price uncertainty is reduced and the market will much
faster be back to trading at the right price level. Furthermore the workload for member firms is
reduced since they do not have to take a dialogue with Market Surveillance and await a similar
dialogue between Market Surveillance and the counterpart in the trade.
OMX Stockholm does not have matching halts in connection with company announcements like
OMX Copenhagen.
OMX Helsinki
OMX Helsinki has been using trading safeguards since 1987. Trading safeguards define the
maximum acceptable percentage deviation of the order price from a reference price defined by the
previous day’s closing price. Orders outside this range are rejected to entering the order book. The
default static price deviation range for equities and ETFs is +/- 15%, for other cash market
instruments +/- 50% and for bonds +/- 20%. The acceptable percentage deviation as well as the
reference price for an individual security can be changed by Market Surveillance on intraday basis.
Orders are validated against the trading safeguards at the beginning of the trading day. If an order
fails the validation it is cancelled. No new intraday checks are performed for orders already entered
into the order book when the price range or the reference price is changed.
OMX Helsinki does not have matching halts in connection with company announcements.
Oslo Børs
Oslo Børs uses matching halts similar as OMX Copenhagen. Trading Surveillance assess all
important announcements before releasing them to the market to decide whether or not to use a
matching halt in connection with the release of the announcement. This halt is usually only for a few
minutes with a call auction of 5 minutes opening the trading again. The same rules for order deletion
and entries as OMX Copenhagen applies in Oslo, this is also valid for the information market
participants get from the auction period. Also off exchange trades can be reported during the
matching halt.
Oslo Børs also uses matching halts when there are significant price movements where the Trading
Surveillance either suspects a leakage of price sensitive information, or where the trading pattern is
abnormal and an investigation of the trading pattern is necessary. The Trading Surveillance decides
when a matching halt for this reason shall be imposed. Oslo Børs normally halts trading with
matching halts over 300 times a year, where 90% of this is due to release of price sensitive company
announcements.
10(22)Oslo Børs, as OMX Stockholm, uses forced cancellation in situations where erroneous trades,
breaches of rules and regulations or system failures have taken place. Oslo issued a circular
regarding this in 2002, which on the issue of forced cancellation is similar to the note which is
currently being discussed in NOREX. Oslo Børs uses forced cancellation at least once a month.
ICEX
Iceland Stock Exchange (ICEX) uses matching halt at the order book level. When interim and
annual financial statements and announcements regarding companies are published in the ICEX
News System, the appropriate order book is set to a matching halt for 10 minutes. When AGM’s or
shareholder meetings take place the appropriate order book is set to a matching halt and released five
minutes after the results from the meeting have been published in ICEX News System.
Matching halt is also used at ICEX if there are significant price movements and leakage of
information to the market is suspected. ICEX has only halted trading for this reason on a few
occasions.
ICEX uses similar principles of forced cancellation as OMX Stockholm. The principles of forced
cancellation have only been needed on rare occasions in the past. ICEX is taking part in discussions
at the NOREX level on cancellation policies and expects to adopt guidelines on forced cancellations
identical to the ones planned for OMX Stockholm and OMX Copenhagen.
Academic testimony
Researchers and regulators have not reached consensus on whether circuit breakers provide a
moderating influence. American exchanges instituted circuit breakers in 1988 in an effort to protect
investors and markets in the event of a future extreme market adjustment. Opponents contend that
mandated trading halts impede the natural movement of stock prices and introduce unnecessary and
artificial barriers1.
One might expect that circuit breakers would reduce volatility in shares, since relatively big price
movements are followed by a matching halt, giving investors time to evaluate any new information
and reconsider their interests. However various studies (e.g. by Eskandar A. Tooma and Maged S.
Sourial2) find that circuit breakers fail to dampen volatility in the market. Their results imply that the
circuit breakers contributed in increasing investors’ risk aversion, reduction of investors’ welfare
and added distortions to the market made it impossible for efficient pricing.
Recep Bildik and Selim Elekdag3 argue that circuit breakers have two attributes to control volatility:
first, they establish price constraints, second, they provide time for rational reassessment during
times of panic trading. Supposedly, it prevents freefall of prices, prevents wild swings and provides
1
‘An experimental study of circuit breakers: The effects of mandated market closures and temporary halts on
market behavior’, by Lucy F. Ackert, Bryan Church and Narayanan Jayaraman, Journal of Financial Markets,
4/2001
2
‘Modelling the Egyptian Stock Market volatility pre- and post circuit breaker’, by Eskandar A. Tooma and
Maged S. Sourial
3
’Effects of price limits on volatility: Evidence from the Istanbul Stock Exchange’, by Recep Bildik and Selim
Elekdag,
11(22)time-out period to cool-off. They find however that an increase in the price limit (range) in 1994 has
decreased volatility on Istanbul Stock Exchange.
Ackers, Church and Jayaraman4 find that circuit breakers perform no useful function in their
experimental asset markets. Their results indicate that circuit breakers fail to temper unwarranted
price movements in periods without private information. Investors appear to mistakenly infer that
others possess private information, causing prices to move away from fundamental value. They find
that a temporary halt leads to a greater price deviation from the fundamental value compared to
market closure, since the investors have to make decisions under time pressure.
Lucy F. Ackert, Bryan Church and Narayanan Jayaraman examine the effects of market closure and
temporary halts on trading and pricing. They find that the absolute deviation in price from the
expected price is not significantly different across regulatory regimes (market closure, temporary
halt or no interruption). In their analysis circuit breakers affect trading activity in a significant way.
In particular, market participants accelerate their trade if a trading interruption is imminent. While
no real downside risk to circuit breakers are suggested, the benefits are also not apparent since they
do not improve pricing efficiency.
Michael A. Goldstein and Kenneth A. Kavajecz’s5 results suggest that uncertainty associated with
the disruption of continuous trading markets caused by market closures is larger than the uncertainty
associated with a sharp decline in market prices during an open market.
4
’Circuit Breakers with uncertainty about the presence of informed agents: I know what you know… I think’,
by Lucy F. Ackert, Bryan K. Church and Narayanan Jayaraman, Working Paper 2002-25, December 2002
5
’Trading strategies during circuit breakers and extreme market movements’, by Michael A. Goldstein and
Kenneth A. Kavajecz, Journal of Financial Markets, 7/2004
12(22)Proposal for circuit breakers and trading safeguards
OMX and Oslo Børs recommend implementation of circuit breakers – including both a static and a
dynamic range. ICEX proposes implementation of circuit breakers using only dynamic price range.
The purpose of implementing circuit breakers is to reduce uncertainty in volatile markets or in
connection with company announcements. Circuit breakers used simultaneously with safeguards are
also expected to significantly reduce the number of erroneous trades at strongly deviating prices, and
any following stop loss orders and forced cancellation of trades. These erroneous trades do not only
cause extra work and costs for the involved parties but also increases uncertainty regarding the share
price.
OMX, Oslo Børs and Iceland Stock Exchange propose that circuit breakers will apply to the
following markets:
• Listed Equities
• Investment Funds/Exchange Traded Funds (ETFs)
• First North
The circuit breakers will not apply for warrants and equity rights.
Beyond the question whether to implement circuit breakers or not, it has to be defined how these
should function if implemented. Below is the proposal in details:
Reference prices
For the static price range OMX and Oslo Børs will use the last auction price as reference price. This
assures that the price range is updated in connection with major price movements and do not trigger
too many interruptions. If however the previous day did not have any trades in the closing auction,
OMX and Oslo Børs will in stead use last traded price until an auction price is available. This is
because the last traded price is expected to be more guiding than for instance previous days opening
call price.
The dynamic range will be updated by last traded price – both trades generated in the SAXESS
system and reported off-exchange trades updating the last paid. This of course includes trades during
continuous trading as well as matched trades in a call auction.
Stages in and length of the interruption
The interruption will start with a 30 seconds of pre-call state meaning that orders in the order book
will be hidden (closed call). During the pre-call state orders will not be matched in the Saxess
trading system. After the pre-call state the interruption will continue with a call auction (CLIN) for
three minutes plus random zero to 30 seconds ending with an un-cross – price determination and
matching of orders. This call state is an open call auction where the orders in the order book are
shown as Market by level (MBL). In both pre-call and Call interaction it will be possible to enter,
modify or delete orders as well as suspend and activate orders.
When the call auction begins the total volume at the five best price levels will be exposed including
hidden volume (iceberg orders). The volume will be shown as market by level, meaning total
13(22)volume at each of these price levels. It will not be possible to see the size of the individual orders.
As mentioned earlier it is possible to avoid disclosure of orders with hidden volume, when placing
an order, by deciding that the order shall be valid until the start of “next call”. Alternatively the pre-
call state can be used to remove orders with hidden volume. The interruption may be used to
evaluate any new information and reconsider ones interests.
Reporting of trades will not be possible during the interruption. OMX, Oslo Børs and Iceland Stock
Exchange propose that trades that are prevented being reported due to a circuit breaker interruption
should be reported just after the order book change state to continuous trading. The reporting rules
and Norex Member Rules (5.6.19) will be changed in line with the implementation of circuit
breakers.
The interruption could in general be set shorter, but we estimate that at least a few minutes are
needed to evaluate any new information. Furthermore market surveillance may need time to contact
members regarding deviating orders etc. If the interruption is too short, orders will not be entered in
the call auction making the price less sharp. With a less sharp price – or no price at all – from the
call auction there is a great risk of triggering another circuit breaker shortly after. These repeating
interruptions could be disturbing and harmful for the trading and the liquidity.
Segmentation
Not all shares should have the same static and dynamic price ranges, since there is a significant
difference in liquidity between the different shares. An appropriate price range for a very liquid blue
chip share will not be appropriate for a less liquid share with a wider spread. One possibility could
be to use the Nordic List (Large Cap, Mid Cap and Small Cap) as segmentation. However the
liquidity differs a lot within these groups, so it can be difficult to have the same price ranges for both
very liquid and less liquid Small Cap companies.
OMX, Oslo Børs and Iceland Stock Exchange proposes that the blue chip indices (OMXC20,
OMXH25, OMXS30, OBX and ICEX15) are used as one segment and all other shares listed at
OMX Copenhagen, OMX Helsinki, OMX Stockholm, Oslo Børs and Iceland Stock Exchange are
used as another segment. Furthermore Investment Funds and ETFs and shares at First North can be
separate segments with separate parameters.
OMX, Oslo Børs and ICEX reserve the right to use another segmentation if we conclude that it will
be more beneficial for the individual order books e.g. if some order books are triggering more circuit
breakers than appropriate.
Width of price ranges
It is important to stress that OMX, Oslo Børs and Iceland Stock Exchange do not want too many
interruptions. The aim is to find a range that will trigger a circuit breaker when necessary but not
more than that. If the range is too wide it will not trigger when needed, and if it is too narrow it will
trigger far too often without sufficient reason and disturb the trading instead.
OMX and Oslo Børs proposes that static range will be reference price +/- 10% for blue chip shares
(OMXC20, OMXH25, OMXS30 and OBX) as well as Investment Funds. Investment funds are
included in this segment because they are expected to be traded around intrinsic value. We propose a
14(22)static price range for all other shares and First North with a reference price of +/- 15%. The reason
for a wider range for this segment is the anticipated lower liquidity in these order books.
Iceland Stock Exchange proposes not to use a static reference price.
For the dynamic range OMX and Oslo Børs proposes the following thresholds:
Reference price Segment
+/- 2% Blue chip shares (OMXC20, OMXH25, OMXS30 and OBX)
+/- 2% Investment funds (ETFs)
+/- 5% All other listed shares
+/- 5% First North
Iceland Stock Exchange proposes only to use a dynamic price range with the following thresholds:
Reference price Segment
+/- 5% Blue chip shares (ICEX-15)
+/- 25% All other listed shares
Since Iceland Stock Exchange is not proposing a static price range, circuit breakers will not be
triggered during call auctions. Apart from not using a static reference price, the general setup for
implementing circuit breakers at ICEX is the same as the OMX and Oslo Børs proposal.
OMX, Oslo Børs and ICEX reserve the right to to change the thresholds for the reference prices if
we conclude that it will be more beneficial for the segments e.g. if some order books are triggering
more circuit breakers than appropriate.
Penny shares
A dynamic range of 2% or 5% can be problematic for shares trading at low absolute prices – so-
called penny shares – because the tick size may result in a spread of several percents. Furthermore
several penny shares have a lower liquidity and a spread of several ticks. Hence the circuit breaker
would be triggered at almost any price change. To hinder this OMX and Oslo Børs proposes special
static and dynamic ranges for penny shares.
Static price range for listed shares, First North, Investment Funds and ETFs:
+/- 40% - however never less than 0.15 EUR/DKK/SEK/NOK.
Dynamic price range for listed shares, First North, Investment Funds and ETFs:
+/- 20% - however never less than 0.05 EUR/DKK/SEK/NOK.
The definition of a penny share is an instrument with an absolute price of less than 5
DKK/SEK/NOK or 0.50 EUR.
For Iceland Stock Exchange the 25% threshold includes penny shares. A circuit breaker can,
however, never be triggered by an absolute price change of less than 0.05 (in the currency of the
order book) even if it exceeds 25%.
15(22)Fast markets
While circuit breakers are volatility interruptions for individual order books, it is also necessary to
have focus on volatility on the market as a whole. Some European exchanges have a rule for
expanding the thresholds when a “fast market” occurs. A “fast market” is a market with a significant
volatility of prices. The high volatility is caused by either technical, political or economic reasons
and the entire market acts with uncertainty in the price determination. But there is no straight
definition of a “fast market” and hence it is the exchanges that decide whether there is a “fast
market” and will inform the market participants. We propose that when the market surveillance on
each exchange decides the market to be a “fast market” the circuit breaker thresholds will be
doubled.
Publication of the static and dynamic range
At Deutche Börse they have chosen not to publish the size/width of the static and dynamic ranges.
This means that the market participants don’t know when a circuit breaker is trigged and hence they
can not speculate in the triggering of a circuit breaker. However the market participants can learn by
observing the triggering of circuit breakers.
On the other hand it can be beneficial for the individual market participant to know if a circuit
breaker is getting closer and is about to be triggered. The other European exchanges with circuit
breakers have chosen to publish the static and dynamic ranges.
OMX, Oslo Børs and Iceland Stock Exchange propose that the static and dynamic ranges are
published to increase the transparency. Unexpected interruptions could be disturbing for the traders,
and the ranges would somewhat be revealed sooner or later. We do not expect traders to take
advantage of their knowledge of the trading ranges since all orders should reflect the current market
value according to Norex Member Rules 4.6.1.
When circuit breakers are triggered
OMX, Oslo Børs and Iceland Stock Exchange propose that circuit breakers do not apply during the
opening call. We believe that any new information after the markets are closed will be included in
the price of new orders entered in the opening call. We expect the current 15 minutes to be sufficient
time to calculate the opening equilibrium price.
Circuit breakers will apply during intraday auctions and closing auctions. If the price in the call
auction ends on or outside the static range the auction will be extended for 90 seconds plus random
zero to 30 seconds. It will however only be extended once. For the closing auction this may delay
the time of closing, but expectedly the delay will be insignificant. The dynamic range does not apply
during call auctions.
A circuit breaker will be triggered during continuous trading when an entered order in Saxess will
lead to a trade on or outside the static or dynamic range. The triggering order will be matched up to
the range but not with orders on or outside the range. The unmatched part of the order will remain in
the order book. ‘Fill or Kill’ orders are an exception. This type of orders will never trigger a circuit
breaker. If the price on a ‘Fill or Kill’ order is outside the statistic or dynamic range it will be
rejected leading to no trades.
16(22)‘Fill and Kill’ orders with a limit price outside the dynamic or static range will be matched with
orders within the price range but not with orders on or outside the range. The unexecuted part of the
‘fill and kill’ order will trigger a circuit breaker, but will not be registered in the order book.
The triggering of a circuit breaker in a security does not lead to circuit breakers in other securities
e.g. shares of same company or derivatives.
Trading safeguards
Furthermore OMX, Oslo Børs and ICEX recommends that also trading safeguards (as in OMX
Helsinki today) will be implemented and used simultaneously with circuit breakers.
A safeguard rejects orders that deviate significantly from a reference price. OMX, Oslo Børs and
ICEX propose to use last traded price as reference price. Compared to circuit breakers the price
range for safeguards are wider and the purpose of safeguards is primarily to avoid erroneous order
entries.
OMX, Oslo Børs and ICEX propose that safeguards are implemented as soon a spossible.
Forced cancellation of trades
If it is decided to implement circuit breakers and trading safeguards we still recommend our
members to have a front end filter or internal safeguards to avoid erroneous order inputs.
During the summer 2006 the Norex Forced Cancellation Guidelines are expected to be published6.
The written guidelines are in line with Norex Member Rules 5.7.3.
When the Exchange initiates forced cancellation, the cancellation normally does not include the
trades which are considered to be at the market price. Trades at the spread or close to spread (3rd
level of the order book prior to the Erroneous Transaction) will normally not be cancelled, if there is
no extraordinary reason to consider this differently. All trades deviating more than 10 % from last
entered order updating the spread will normally be cancelled, if there is no extraordinary reason to
consider this differently.
If circuit breakers and trading safeguards are implemented the definition of cancellation thresholds
will be changed in line with the thresholds for the reference prices of the circuit breaker. We expect
that the number of erroneous trades and other trades that needs to be cancelled will decline
significantly. But it will still be necessary to have guidelines for cancellation of trades.
There still might be incidents that demand the revised forced cancellation guidelines. In situations
when the market is trading with a clear misunderstanding of information, e.g. if the market is
uncertain of an ex-date for extraordinary dividends or if a member has failed to cancel erroneous
orders causing the interruption..
If circuit breakers or trading safeguards are implemented orders might be rejected. Norex Member
Rules 4.6.3 allows the exchanges to reject or cancel orders that are clearly deviating from the market
price. Also orders with condition fill or kill that exceeds the price threshold will be rejected in full.
6
The guidelines may not apply for all Norex Exchanges
17(22)Effects on the markets
OMX
OMX has analysed and is still analysing the consequences of the proposed price ranges and tested
other price ranges as well. We have analysed the trading for three normal weeks (week 5, 10 and 17
in 2006) in a setup with circuit breakers. Hence we have not yet deeply analysed particularly active
or unusual periods with high volatility or many company announcements. We should expect that
more circuit breakers are triggered in such active or volatile periods. This is one of the purposes of
the circuit breakers: to give a time out and launch an auction to reduce the price uncertainty.
Circuit breakers because of the static price range will be relatively rare. In Copenhagen and Helsinki
we can expect around one in two days for each country. In Stockholm two per day should be
expected. Of Swedish circuit breakers 75% are from ‘Other shares’, 18% from penny shares and the
remaining 7% from blue chips.
By far the most circuit breakers will be triggered because of the dynamic range. The blue chip range
of +/- 2% will trigger a break once a week in Copenhagen (20 shares corresponding to once in 100
days for each share), twice a week in Stockholm (30 shares corresponding to once in 75 days for
each share) and 4 times a week in Helsinki (25 shares corresponding to once in 31 days for each
share).
A range of +/- 20% for penny shares will only rarely lead to a circuit breaker in Copenhagen or
Helsinki (no observations in analysed three weeks) and about once a week in Stockholm (approx. 25
shares corresponding to once in 125 days for each share).
A range of +/- 5% for other shares will trigger circuit breakers twice a day in Helsinki, four times a
day in Copenhagen and six times a day in Stockholm. On average this corresponds to once in 40
days for others shares at Copenhagen and Stockholm and once in 70 days for other shares at
Helsinki.
Each share traded at First North (also +/- 5%) will be interrupted about once in 15 days. Investment
funds in Copenhagen will trigger around five circuit breakers a day with a range of +/- 2%
corresponding to once in 60 days for each fund.
ICEX
ICEX has analysed the potential effect of introducing circuit breakers based on trading data for the
first half of 2006. The analysis indicates that the proposed dynamic price range of +/- 5% for ICEX-
15 companies would have triggered circuit breakers on five occasions (in four different order books)
during this period. A clear trader error in order placement was responsible for one of these instances.
The threshold of +/-25% for “other” shares would, on the other hand, not have resulted in any circuit
breakers.
ICEX has also investigated the likely impact of other dynamic price ranges in order to help members
formulate an opinion on the appropriate threshold levels. If the dynamic range is narrowed to +/-4%
for ICEX-15 companies, the analysis indicates that the number of circuit breakers would more than
double. Using a narrower range of +/- 15% for other companies would have triggered circuit
breakers twice during the first half of 2006.
18(22)Finally, if ICEX were to adopt the dynamic range proposed for OMX (+/-2% for ICEX-15
companies and +/-5% for other companies), the data indicate that the number of circuit breakers
would be far greater than ICEX considers desirable. The simulations for the first half of this year
suggest that circuit breakers would have been triggered between 150 and 200 times for ICEX-15
companies and between 10 and 15 times for other companies.
19(22)Questionnaire
Company:
Contact person:
Contact details:
Member of the following exchanges
Copenhagen Stock Exchange Oslo Børs
Stockholm Stock Exchange Iceland Stock Exchange
Helsinki Stock Exchange
To be able to compile and evaluate all answers on circuit breakers in an efficient way, we would
appreciate if all members could take the time to give this topic some attention. Please note that we
would like the feedback to reflect the member firms’ collective view rather than a specific person’s
personal view. Generally, we will follow our members’ collective view. However, OMX, Oslo Børs
and ICEX still reserves a final decision for exceptional circumstances. We need your answer no later
than 21 August. If you are indifferent about some questions please leave these blank.
All answers will be distributed to all members unless you prefer your answers to be confidential.
Our answers are for internal use only
1. Use of circuit breakers on the equity market
Do you support the implementation of circuit breakers?
Yes, we support the implementation of circuit breakers
No, we do not support implementation of circuit breakers
20(22)2. Trading Safeguards
Do you support the implementation of trading safeguards?
Yes, we support the implementation of trading safeguards *
No, we do not support implementation of trading safeguards
* a new proposal for the safeguards thresholds will be distributed to all members
If the members support the use of trading safeguards, the functionality will be implemented as soon
as possible.
Comments:
3. Fast markets
If circuit breakers are preferred - the exchange can consider a market to be a “fast market”. Under
these conditions the static and dynamic ranges are proposed to be doubled. Do you support
expansion of thresholds during “fast markets”?
Yes, the thresholds should be doubled
No, we prefer the same thresholds as under normal conditions
4. Circuit breakers in opening auction
OMX and Oslo Børs propose that circuit breakers do not apply in opening auction. Do you support
this proposal or do you prefer circuit breakers in the opening auction using static price range.
Yes, we support no circuit breakers in the opening auction
No, we prefer that circuit breakers apply in the opening auction
Since ICEX does not propose the use of a static reference price, there will be no circuit breakers in
the opening auction on ICEX.
21(22)5. Comments to the above answers or other comments
If you have any questions or want to set up a meeting to discuss these topics with the exchange
please do not hesitate to contact your Account Manager within OMX, Oslo Børs or Iceland Stock
Exchange.
Please send your answer by e-mail no later than Monday 21 August 2006 to:
Account Manager, Jakob Kaule Poulsen
E-mail: jakob.kaule@omxgroup.com
Tel: +45 3377 0384
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