COPENHAGEN (BLOOMBERG) - Nasdaq OMX Group's global trading head says the collapse in Chinese share prices, the biggest in two decades, suggests the country needs to follow Europe and the US and halt trading when prices plunge.
Chinese officials should consider implementing so-called circuit breakers when price losses or gains are extreme, Hans- Ole Jochumsen, president of global trading and market services at Nasdaq, said in an interview in Copenhagen on Tuesday. Such triggers can help avert the kind of panic selling that gripped Chinese stocks this week, he said.
"In Europe, each exchange can have its own system for triggers and they have," MR Jochumsen said. "It works. We haven't had any flash crashes in Europe."
China's stocks extended the steepest five-day drop since 1996 after a rate cut by the People's Bank of China failed to stem a rout that followed the devaluation of the yuan. The Shanghai Composite Index fell 1.3 per cent at the close, after plunging 7.6 per cent on Tuesday.
The government halted its intervention in the equity market earlier this week, according to people familiar with the situation. China already has banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, and ordered government-owned institutions to maintain, or boost, their stock holdings.
Such measures risk feeding a downward spiral by driving away investors, MR Jochumsen said. Better to impose circuit breakers, he said.
"The way regulators in China are handling the situation is, in reality, they create a situation in which people cannot get out," Jochumsen said. "When you buy, you cannot know whether you can get out. That creates a pretty unhealthy situation."
Circuit breakers have become features of markets in both Europe and the US. They were introduced after the 1987 crash.
Earlier this week, the plunge in stocks almost triggered the first of a series of circuit breakers on the US market, MR Jochumsen said. The Standard & Poor's 500 Index dropped as much as 5.3 per cent on Aug. 24, nearing the 7 per cent threshold that would automatically have brought trading to a halt across all US markets for 15 minutes.
"If you want to control markets it is very difficult," MR Jochumsen said. "You can regulate but you cannot control." With circuit breakers, "you create a break where people have the opportunity to think before they move on."