·         ZSE halts trading in more than 2-sessions

·         Circuit breakers are effective in preventing market failure

·         Currency volatility driving rapid fluctuations on ZSE

Harare - Since the beginning of June, the Zimbabwe Stock Exchange (ZSE) has instituted a trading halt in more than two sessions. A 30-minutes cooling off period is typically implemented when the mainstream ZSE All Share Index reaches the 10% threshold on the upside, according to circuit breakers introduced in April of 2022 in a bid to avoid market failure. Many have since been wondering what is meant by “market failure” and how circuit breakers aid in preventing it.

Stock markets are an essential part of the global economy, providing a platform for companies to raise capital and for investors to buy and sell shares. However, for close to 3-years now, the ZSE has been highly susceptible to sudden and unexpected fluctuations owing, mainly, to macro-economic developments. These fluctuations have largely been attributed to rampant inflation and a runaway exchange rate which has driven prospective investors to hedge value in ZWL denominated stocks. Consequently, the demand for value preservation has put pressure on stocks, resulting in price increments which are driven less by fundamental growth of companies and more by speculation and the increasing money supply levels. In May of 2023, the ZSE rose by over 160% in nominal terms. However, this translated to only 4% in US$ terms, which is reflective of the fragility of the local currency. In a bid to curb the rush to dump the local unit on ZSE (which in-turn would lead to increased demand for US$’s, on the downside) the ZSE introduced circuit breakers which limit counters from growing by over 15% in one session, and would also see the overall market cool off for 30-minutes after every 10% surge. When these stock price fluctuations become too extreme, they can lead to market failure, which can have devastating consequences for investors and the broader economy.

A stock market failure is a sudden and unexpected movement in stock prices. This is usually attributed to a big economic crisis, which is induced by the rampant inflation in the country and a fragile ZWL. Reactionary public concern about the rate of devaluation of the ZWL has also been a key influence, prompting panic buying and further increasing prices.

Circuit breakers are mechanisms that temporarily halt trading when prices move too far in one direction or when trading volumes become too high. By doing so, circuit breakers help to prevent panic selling and other forms of irrational behavior that can lead to market failure. There are several different types of circuit breakers that stock markets use. The most common type is the price-based circuit breaker, which was introduced on the ZSE. This type of circuit breaker is triggered when the price of a particular security moves beyond a predetermined threshold. Price limits, which are also part of the circuit breakers on ZSE, are restrictions on how much a stock's price can move in a single day. Price limits are typically set as a percentage of the previous day's closing price. For example, since the stocks’ price limit is set at 15%, if Delta’s closing price on Thursday was ZWL4,076.92, then its maximum allowable price movement on Friday would be 611.54 (15% of ZWL4,076.92). If the stock's price moves up or down by more than ZWL611.54 during Friday's trading session, trading will be halted.

Price limits help prevent sudden and extreme fluctuations in share prices, which can lead to market failure. By limiting how much a stock's price can move in a single day, investors have time to adjust their positions and prevent panic selling or buying.

Another type of circuit breaker is the volume-based circuit breaker. This type of circuit breaker is triggered when trading volumes become too high. For example, if there is an unusually large number of trades in a particular security within a short period of time, trading may be halted to prevent further volatility.

To understand how circuit breakers prevent market failure in layman terms, take the stock market failure as a bank-run. A bank run is when customers flock to banks, either physically or online, to withdraw their funds because they lose confidence in the bank. In extreme cases, they can cause the collapse of a bank, as a bank run did in 2023 when Silicon Valley Bank became insolvent. However, imagine if the bank had “circuit breakers” on withdrawals and transactions amid a panic, in any situation. This means the customers would be limited on the amount they can withdraw or transact from the bank, which buys the bank time to calm the situation and ensure continuity.

On the other side, circuit breakers are not perfect solutions to market volatility. They can sometimes exacerbate volatility by creating uncertainty among investors about when trading will resume and at what prices. However, they are generally considered to be effective tools for preventing market failure and protecting investors from sudden and unexpected losses. In conclusion, the ZSE is better off relying on circuit breakers to prevent market failure and protect investors from sudden and unexpected losses. While these mechanisms are not perfect solutions to market volatility, they have proven to be effective tools for maintaining stability in the face of extreme fluctuations around the globe. As such, they will likely continue to play an important role in the functioning of the local bourse.

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