NSE’s Unprecedented Circuit Breaker Event— Questions Arising
Today, for the first time since it was introduced in 2016, the Nigerian Stock Exchange (NSE) circuit breaker was triggered after the NSE ASI rose beyond the set threshold of 5%.
In layman's terms, it means that there was so much gains made on the market that the NSE had all trades paused. This halt for all stocks lasted for 30 minutes.
What's curious for me is the trigger.
Stock exchanges around the world use trading curbs to guard against extreme market volatility and massive panic sell-offs. Too much gains and too much losses can crash the stock market.
However in instances that these happen the reasons are clear; they are plain for all to see.
The New York stock exchange tripped the circuit breaker 3 times this year alone, all in March - 9, 12 & 18. The reason was clear. The Dow Jones fell by 7.9% on fears of the COVID-19 coronavirus and falling oil prices. Before then, from September 11 to 17, 2001, the NYSE was closed due to massive panic sales. When it was opened on September 18, it still fell 7.1%. Why? Simple - The Terrorist Attacks.
The United States is hardly alone in this. This year has been particularly notorious. Global rout triggered circuit-breaker moments on stock markets in the Philippines, Thailand, Indonesia and India. In Brazil, the benchmark Bovespa index stock market was halted twice in one day in March. China's Shenghen exchange in 2016 was halted after the authorities proposed to lift insider selling.
Most European bourses are not like the rest of world where stock market-wide circuit breakers are used, they use circuit breakers for individual 'problematic' stocks. Even at this, the reasons for the halt are known.
What is the reason for Nigeria's circuit breaker? In the coming days, there will be theories. A few plausible, many not so much. Bloomberg says it's because investors are in a hunt for assets with attractive yields. Very unattractive yields in other asset classes in Nigeria has been this way for at least 9 months running. Why the sudden interest?
But it's worth noting that the stocks that led to this halting do not raise eyebrows.
The Manufacturing sector led the gainers chart - all over 10%. Is there any government policy in their favour at this time? Are local and international investors excited about the sector? You know the answer.
The banking sector led by volume of trade. What is suddenly intoxicating to investors about the Nigerian traditional banking system? You know the answer.
No matter the answer provided in the coming days, the fact that the reason for the great surge in the confidence of Nigerian big businesses is not immediately obvious can only be a red flag.
It's a case of the more you look, the less you see.