My Doctoral dissertation is a compendium of essays pertaining to an oft-implemented intervening instrument in financial market microstructure: circuit breakers. Inspired by electrical engineering use of a fuse to prevent damage to a circuit by current overflow, financial regulators and exchanges, since late 1980s, began employing mandated collars to prevent price fluctuation beyond a bracket deemed reasonable. This practice, though widespread in equity and futures markets, is controversial. Proponents claim it endows a propitious time-out when asset (or market) prices are stressed and persuades traders to make rational trading decisions. Opponents demur its potency, castigating it a barrier to laissez-faire price discovery process. Due to conflicting empirical evidences, difficulty in measuring counterfactuals, and a host of statistical methodological constraints, financial economists and industry experts are forked in their views regarding circuit breakers’ efficacy. Nonetheless, the practice is a clear favorite among exchanges and regulators, as substantiated by the staggering pace of adoption since the mid-1990s and nigh-zero evidence of an exchange abandoning it altogether. The last few remaining major bastions of anti-circuit breakers too have recently succumbed to the cry for greater regulation; case in point: Singapore Stock Exchange (SGX) and Australian Stock Exchange (ASX). In academia, meanwhile, the topic shows patterns of seasonality. Empirical works examining performances of regulatory rationales, such as deterring volatility, enhancing price discovery, interferences in trading, and a self-fulfilling gravitational pull (dubbed the magnet effect) seem to mushroom soon after headline-grabbing financial crises or flash crashes (as in May 2010 in the US). In fact, theoretical work in the field stagnated in the late 1990s, as empirical works to test them were difficult to undertake due to lack frameworks, acute paucity of data, and failure to address statistical constraints. The 2000s witnessed a slew of empirical works, mostly from the pacific basin markets, as time-series datasets became more accessible. Though Asian markets such as Korea, Taiwan, Tokyo, Shanghai, and Shenzen dominate the studies with mixed results, the only study undertaken in Malaysian market by Chan et al. (2005) found evidence of deterioration in market quality, using transaction data from 1995. Since then, KLSE has become BM, trading platforms and environments have grown sophisticated, and circuit breaker regime in the bourse has undergone multiple tweaks. Despite the changes, the limit of ±30% is intact since 1989, albeit with some qualifications.
The Malaysian praxis is rather confounding for following reasons: