HKEX will roll out tool to curb extreme price swings

New volatility control mechanism similar to models used by SGX, Tokyo Stock Exchange

HONG KONG • The Hong Kong Exchanges & Clearing (HKEX) will next week introduce a measure designed to help deal with extreme price swings in its stock market.

On Monday, the company will roll out a volatility control mechanism for its largest securities. The system will restrict a stock from moving more than 10 per cent during a five-minute period once a session. The new tool will help to stop so-called "fat fingers" and rogue algorithms from causing erroneous price swings, according to the market regulator.

The change comes about a month after the bourse started a closing auction for the first time in seven years after completing a market consultation last year. The new volatility control will be similar to the models used by the Singapore Exchange and Tokyo Stock Exchange.

"If it restricts the wild things, then it's great," said Mr Andrew Sullivan, managing director for sales trading at Haitong International Securities Group. "As long as it doesn't become intrusive, then it's not a bad thing, because it does give that moment for the market to readjust."

The new mechanism will be triggered if a stock climbs or drops 10 per cent from the last-traded price five minutes ago. That would be followed by a five-minute cooling-off period during which the assets can trade only within a prescribed band.

The plan for the new mechanism prompted structured-product market makers to ask the exchange earlier this year to relax requirements for providing instantaneous quotes, said two people familiar with the discussions.

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If it restricts the wild things, then it's great. As long as it doesn't become intrusive, then it's not a bad thing, because it does give that moment for the market to readjust.

MR ANDREW SULLIVAN, managing director for sales trading at Haitong International Securities Group, on the new volatility control measure that the HKEX will introduce on Monday.

Structured products, such as warrants and callable bull/bear contracts, had turnover of about HK$334.2 billion (S$58 billion) on the HKEX last month, equal to over a third of equities trading.

The exchange "has dialogues from time to time with various market participants, including product issuers", a spokesman said by e-mail, declining to provide more details. "HKEX will continue to work with market participants to enhance their understanding of the possible impact on liquidity provision when there is a volatility control mechanism event."

The controls will in the fourth quarter be expanded to include eight index futures contracts, according to the exchange.

The volatility control may help minimise sudden swings in stock prices, but will not stop trading in a stock or derivative for the day.

June 24 was the most volatile trading session for the Hang Seng Index, Hong Kong's equity benchmark, in a year. The index fell by as much as 5.8 per cent and rose by as much as 0.8 per cent in the aftermath of Britain's vote to leave the European Union.

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A version of this article appeared in the print edition of The Straits Times on August 20, 2016, with the headline 'HKEX will roll out tool to curb extreme price swings'. Print Edition | Subscribe