Circuit breaker has both positive and negative impact in Bangladesh stock market. Previously, Bangladesh stock market had 10% circuit breaker. In a trading day, a stock price may increase up to 10% or decrease up to 10%. Recently, Bangladesh stock market has seen the light of another circuit breaker. That is 2% down circuit breaker.
2% down circuit breaker has temporarily saved the market from continuous price falling at the beginning of March, 2022. Moreover, this circuit breaker might have avoided the potential market crash in 2022. But in the long run, circuit breaker may negatively impact on share market.
What is circuit breaker?
A circuit breaker is a method by which the regulator can automatically halt a share’s trading for the day if its price goes beyond set limits…Definition from Daily Star Report
Why did index start to fall in March, 2022?
Initially, potential impact of Ukraine and Russia war negatively affected the world stock market. When the conflict between two countries was escalating, not only Bangladesh stock market but also world largest stock markets saw the sudden price falling. In a single intra-day, DSE Broad index lost more than 100 points.
Index points were falling some more days. We can assume that Ukraine and Russian war was the main culprit of sudden unexpected market. Moreover, crude oil price was increased abruptly due to the war. Crude oil price increase is the main indicator of other products’ prices increase.
Why did authority enforce up to 2% down circuit breaker?
There were two important indicators affect the market seriously. First one was continuous points falling and second one was decreasing volume. In order to protect the investors’ interest, concern authority temporarily enforced 2% circuit breaker.
Undoubtedly, this was a time worthy decision to protect market from another crash. Bangladesh stock market has experienced two crashes- first one in 1994 and second one in 2010. As authorities have the past experience about crashes, they didn’t take risk for another crash.
Did up to 2% down circuit breaker protect the market?
The answer is YES. For this circuit breaker, market took a position. Investors started to force sell as downtrend rally was ongoing. Day after announcing the news, broad market index was in uptrend. Continuously points were increasing.
Transaction volume had increased. Investors somehow protect their capital but they had deprived of buying at discounted price. Circuit breaker has both advantages and disadvantage.
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Negative Side of circuit breaker
Share market should works independently. Previously, Bangladesh stock market was controlled by up to 10% up circuit and 10% down circuit. This regulation may control the market for short time. But it has reduced the change to quick rich from the market.
World largest stock markets have no circuit breaker. Bangladesh stock market has circuit breaker. But Bangladesh stock market doesn’t allow both day trading and short selling. Investors will not buy at discounted price as stock price are allowed to increase up to 10% and fall up to 2%.
Impact of circuit breaker in stock market Example
Suppose a company’s per share price is 100 tk. For three days, its price has been increased @ 10%. For next 2 days, its price has decreased @ 2%. Total price increase is 133.1 tk (100*110%*110%*110%) per share at the end of third day.
For next 2 days’ price falling, this share price is 127.82 tk (133*98%*98%) per share. That’s sound great. It will take many days to return its original 100 tk at 2% down circuit breaker.
This policy is suitable for protecting investors interest. But think about swing traders. They make profit on swing. They have low chance to make money on swing. For long term investors, they have to wait for months after months to buy back stock at discounted price.
Share business is dissimilar from other types of business. If such circuit breaker exists in US market, Warrant Buffett had to wait generation to generation to become such a giant investor.
Read More: How can I buy shares in Bangladesh?
Advantages of circuit breaker
Protecting the capital of general investors is the main benefit of circuit breaker. Moreover, circuit breaker helps investors to lose all capital within a single day! Investors can get rid of fear of losing whole money thanks to circuit breaker rule.
Disadvantages of circuit breaker
Circuit breaker hinders price movement independently. Market can’t work independently. Investors’ actual reaction doesn’t reflect in the market. Low chance to make quick money.
Fear is stronger than greed in share business. Hence, market faces sell pressure whenever any unwanted occurrence occurs in economy. So, investors have to aware of not only domestic economy but also international economy. Circuit breaker may protect the market instantly. in the long run, it will be bad sign both for investors and traders.