Caixin reported on August 5th (Editor Malan) that hit by the expected recession of the U.S. economy, the Asian market kicked off the week poorly, with Japan's stock market triggering a circuit breaker for TOPIX futures (SCB) directly in early trading. This is also the first time that the index futures have triggered a circuit breaker since the integration of Japan's derivatives market in March 2014.

TOPIX futures triggered SCB at 9:16 a.m. local time on Monday and resumed trading ten minutes later. Subsequently, during the midday trading session, the index futures triggered another circuit breaker. Meanwhile, the other benchmark index, Nikkei 225 Index futures, experienced two circuit breakers today.

As of Monday's close, Nikkei 225 index fell 12.4%, and TOPIX index fell 12.23%.

Outside the Japanese market, the South Korean stock market also fell sharply. Korea's main index, Kosdaq, plummeted 8% today, triggering a circuit breaker and suspending trading for 20 minutes.

Today's market collapse in Japan and South Korea can be classified as a "Black Monday," once again focusing the market's attention on the frightening term of circuit breaker. Worth mentioning is that Japan's circuit breakers may differ significantly from the "U.S. style circuit breakers" that investors generally understand.

Overview of the U.S. circuit breaker rules

A brief summary of the U.S. market-wide circuit breaker system: Since 2014, when the S&P 500 index, the benchmark index, reaches a price limit of 7% (compared to the previous trading day's closing price), all stock trading is suspended for 15 minutes; after the suspension of level 1 circuit breaker ends, if the S&P 500 index's price movement deepens to 13%, triggering level 2 circuit breaker, all stock trading will be suspended for another 15 minutes.

Level 1 and Level 2 circuit breakers will not halt trading if they occur after 3:25 p.m. Eastern Time. If the S&P 500 index falls 20% within a day, triggering level 3 circuit breaker, the entire market will stop trading immediately until the next trading day's opening, regardless of when the circuit breaker occurs.

In addition to the market-wide circuit breaker system triggered by index, the U.S. Securities and Exchange Commission has circuit breaker regulations for individual stocks as well.

The upper and lower price limits for S&P 500 index components, Russell 1000 index constituents and other designated stocks are triggered when the price fluctuates up or down 5% within 5 minutes, leading to trading downtime. If the trading price cannot return to the prescribed fluctuation range within 15 seconds, the suspension time will be extended to 5 minutes.

The upper and lower limits for stocks below $3.00 or with lower liquidity are 10% for 5 minutes. The fluctuation of individual stocks is based on the previous day's closing price.

South Korea's Kospi and Kosdaq indices, Thailand's SET index, and India's Nifty and Sensex indices all implement circuit breaker mechanisms based on the previous day's closing price, which are similar in design to those of the United States, but differ in specific numerical values and circuit breaker length.

Among them, the trigger thresholds for Kospi and Kosdaq indices are 8%, 15%, and 20% for circuit breakers of levels one, two, and three, respectively. The suspension of trading for level one and two circuit breakers lasts for 20 minutes, while level three circuit breaker suspends trading for the entire day.

Some other markets use a "reference price" to implement price limits. For example, Singapore restricts specified stocks to within ±10% of the latest trading price five minutes prior. If the limit is exceeded, the stock will enter a 5-minute cooling-off period. During the cooling-off period, trading will not stop, but the bid range will be limited to within ±10%.

Overall, the global circuit breaker system can be divided into two camps regarding whether trading is halted. In this regard, Japan belongs to the larger camp of halting trading, but its specific design is much more complicated than that of countries like the United States.

Japan's circuit breaker rules

There is no market-wide circuit breaker for Japan's stock indexes. The Japan Exchange Group only implements trading suspensions for related futures, options, and other derivatives, each with its own circuit breaker rules.

Taking TOPIX futures, which triggered a circuit breaker on Monday, as an example, its level 1, level 2, and level 3 circuit breaker thresholds are 8%, 12%, and 20%, respectively. If the upper or lower limit of the month-end contracts is reached, the trading of all contract months of futures will be suspended for more than 10 minutes.

The benchmark price of the price change is not simply the previous day's closing price or the latest price 5 minutes ago, but a benchmark price established and uniformly regulated by the Japan Exchange Group. The specific rules are as follows:

The design of Japan's market circuit breaker means that the index itself will not encounter circuit breakers, and individual stocks will not be suspended from trading due to fluctuations in the index as long as they do not trigger the individual stock circuit breaker rules.

However, Japan's rules on individual stock circuit breakers are extremely complex and detailed, making it almost impossible to see a large number of stocks triggering circuit breakers at the same time, thus ensuring the continuity of trading in Japan's stock market.

But this design also means that the fluctuation of the index cannot be suppressed by suspending stock trading, and can only allow derivative products to impact the rise and fall of the large cap index in reverse. Under panic, the effectiveness may be greatly reduced, resulting in the tragedy of the index plummeting ahead and the derivatives trading constantly circuit breaking behind. Today's TOPIX and Nikkei indices seem to have confirmed this result.