During the first week of 2016, China stocks lost roughly 10 percent in what was their worst weekly performance since the market crashed in August of the previous year. The circuit breaker did not trigger the collapse, officials said, but it certainly did not help prevent it either.

    The measures were announced in December after a summer of dramatic market losses, and used for the first time Jan. 4 and again Jan. 7. They automatically stop trading in stock markets that drop or appreciate too sharply — a 15-minute break if the CSI 300 Index moves 5 percent from the market’s previous close, or a whole-day halt if it moves 7 percent or more. Instead of calming investors, they fuelled selling pressure and were then suspended by authorities.THE man responsible for stock circuit breakers says Chinese officials must revise their safety net to avoid creating panic, joining critics who argue the nation’s trading halts were triggered too easily for such a volatile market.

    “They’re just on the wrong track,” said Nicholas Brady, 85, the former U.S. treasury secretary who ran a committee that recommended the curbs on equity trading after the 1987 crash. “They need a set of circuit breakers that appropriately reflects their market.”

    Brady spoke last Thursday after Chinese regulators suspended their newly introduced program that ends stock trading for the entire day after a 7 percent plunge. The halt was set off twice in its first week of operation, bolstering speculation China set its threshold too low.

    “The right thing to do is to widen their band,” Brady said in an interview.

    The United States confronted a similar problem in the 1990s. The curb that the Brady Commission helped implement shut the market for the first time Oct. 27, 1997, when the Dow Jones Industry Average lost 554 points. That was only a 7.2 percent decline, almost identical to the Thursday plunge in China’s CSI 300 Index.

    The trouble was that a decade-long surge in U.S. stock prices had diminished the value of each point in the Dow. The 1987 crash’s 508-point slump had amounted to a 23 percent tumble, three times greater than the decline that froze trading 10 years later. Regulators and exchanges pushed through a revision: If the Dow fell 10 percent, there would be an hour pause. At 20 percent, trading would cease for two hours, and at 30 percent, the day would end early.

    In recent years, the benchmark that triggers the halts switched to the Standard & Poor’s 500 Index and the levels changed. Now it takes 7 percent and 13 percent drops to prompt a brief pause, and a 20 percent decline to close markets early for the day.

    Whereas 7 percent losses are rare in the United States — they were only common during the 2008 financial crisis, October 1987, and the Great Depression — Chinese shares have dropped about that much seven times in the past year.

    “I don’t think this is an exact science,” said Sang Lee, an analyst at financial-markets researcher Aite Group. With circuit breakers, “If you set these too low, instead of easing volatility it may increase volatility.”

    That echoes the view of Brady, who was chairman of Wall Street powerhouse Dillon Read & Co. when U.S. President Ronald Reagan asked him to figure out what happened during the 1987 crash and propose solutions.

    The basic idea was to give humans time to reflect on what just happened following a plunge, to decide whether losses had gone too far and whether it was time to buy. “If anything, it’s more necessary now because computers are faster and people’s brains are about the same speed,” according to Robert Glauber, a Harvard University lecturer who advised the Brady Commission.

    The China Securities Regulatory Commission said last Thursday that it was suspending the circuit-breakers program, adding to concern policy makers are struggling with how to contain turmoil in the nation’s financial markets.

    Some investors in China said the circuit breaker had actually intensified losses, prompting traders to dump shares out of fear they’d be stuck holding stock if the pause was triggered.

    That conflicts with Brady’s vision for what circuit breakers are meant to do. “The circuit breaker that I invented restores calm,” he said.

    (SD-Agencies)