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New IPO measure implemented today

While the Taiwan Stock Exchange will formally implement a new measure today for new companies trading shares in Taiwan, another proposed measure is expected to have a more profound effect on the stock market in the long run, pundits said yesterday.

The stock exchange will from today allow initial public offerings (IPOs) by companies to trade without restriction for the first five days. But as from September, the stock exchange will also apply a so-called "circuit-breaker" system to prevent panic-selling in the market.

The circuit-breaker system will work as a reminder for stock investors to address excessive volatility in the local stock market without interfering in its normal daily trading, a stock exchange official said.

"Once the circuit breaker has been triggered, investors will have a short period of time to calm down and manage any downward movement of shares so as to prevent losses," said the Taiwan Stock Exchange Corp (TSE) senior executive vice president Su Song-chin (蘇松欽).

"It will be executed once a day so as to respect the market mechanism [once the daily limit is proposed to be raised from 7 percent to 15 percent]," Su said.

The implementation of a circuit breaker is a mechanism to bring stock trading to a temporary halt to ease the market. It is usually employed when a certain index falls below a pre-determined level in one session, to prevent further losses.

The stock exchange, last Thursday, announced that it will officially phase out a rule in September that prevents locally traded stocks from rising or falling by more than 7 percent a day. The 7 percent daily limit will also be raised to 15 percent in September, according to the exchange.

Supporting measures will also kick in to ensure the stock market's stability, including the implementation of circuit breakers to halt trading for 30 minutes when the TAIEX falls by more than 10 percent from the previous day's close.

The proposed circuit breaker can be used as much as once per day but won't be employed in the last trading hour, the stock regulator's statement said.

Circuit breakers are widely used in other stock markets, like in the US and South Korea, to stop panic-selling.

According to Su, the proposed change in the share regulations follows the example of the Seoul Bourse, which also has a 15 percent daily limit.

During the 30 minutes when trading stops, the market will be given enough time to cool off and companies will have time to dissemble any negative news that impacted their share prices, while investors will have the time to make well-considered investment decisions, Su said.

According to Robert Schwartz, a finance professor at the University of New York, the circuit-breaker procedure could be effective if properly used.

But there were times it wasn't effective, Schwartz said in a paper he prepared for a AEI-Brooking Joint Center Conference in April, 2000.

For example, the US activated a circuit breaker on Oct. 27, 1997 -- a day the Dow Jones Industrial Average fell a total of 554 points, from 7,715 to 7,161. But upon the market's reopening in the afternoon, traders sensing that the market could be closed again, shot in their sell orders and the market plunged another 200 points in half an hour.

A second circuit breaker then kicked in and stopped trading for the rest of the day.

"Clearly, it is not easy to control the emotions of traders and keeping them from the market is not the way to do it," Schwartz said in the paper.

"Neither is it a good idea to prevent the market from producing much-needed price information," he said.

Therefore, Andy Liang (梁永煌), president of the Chinese-language business journal Win Win Weekly (今周刊), yesterday said that he expects the yet-to-be-launched circuit breakers and regulatory changes to have minimal impact on stock investment behaviors.

He said that the circuit breaker will only be activated when major disasters occur such as terrorist attacks, earthquakes or even tsunamis to send the benchmark down by 10 percent.

The new 15 percent daily limit, however, will positively increase investors' sense of risk, since their equity investments may now fall up to 15 percent in one trading day, Liang said.

Liang gave credit to the government's stock-regulatory changes, which are in line with international standards.

Once new regulatory changes are implemented, "Foreign investors will have more confidence in the TAIEX, whose liquidity may be further boosted," Liang said.
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