The Singapore Exchange (SGX) is seeking feedback on whether it should introduce volatility controls for the daily stock trading auction process.
The aim would be to protect investors from incidents like the flash crash in January that briefly wiped US$41 billion (S$55.6 billion) off the market value of blue chip Jardine Matheson.
Since 2014, the SGX has used circuit breakers that slow down sharp moves when a trade is entered at a price that is more than 10 per cent away from the last traded price at least five minutes earlier.
However, circuit breakers work only during continuous trading, not during the auction process that happens at the opening, mid-day and closing of each session.
The SGX is considering introducing price collars or a time extension for the auction period. The move comes after Jardine Matheson plunged 83 per cent in pre-market trading on Jan 24, before the stock rebounded to regular levels as soon as the market opened.
Requests by participants at the time to cancel trades prompted the regulator to think about how it could avoid similar situations.
SGX RegCo chief executive Tan Boon Gin said on Monday that the usual remedy after a price dislocation occurs is to cancel the trade.
"But this remedy is inherently limited. Once too much time has passed, we cannot cancel the trade, otherwise it will cause too much uncertainty in the market," he noted.
"Hence our... policy clearly prescribes that any request to cancel a trade has to come in within 30 minutes of the trade. Once that 30-minute (window) is past, market participants are entitled to assume that the trades are good, and transact accordingly.
"In the case of Jardine Matheson, there were requests to cancel the trades, but the requests came in only after the 30-minute window. We need to consider... safeguards that will kick in before the price dislocations happen."
One option is a price collar that stops orders from being matched beyond a certain price range. The SGX suggests a 30 per cent price collar be applied for the pre-opening auction and 10 per cent ones for the mid-day and closing auction routines. The reference price for the collars would be the last traded price.
The wider 30 per cent price collar for the morning routine takes into account the fact that more news may have come in overnight since trading closed, so a wider band is needed to allow price discovery.
The 10 per cent collar for the middle and the end of the trading day is consistent with the 10 per cent threshold on the circuit breakers.
The second option is to extend the auction routine by four to five minutes if the indicative opening price during the auction moves beyond a certain threshold. This gives the market more time to react.
A notification will be blasted to brokers if an extension is triggered.
The third option is a hybrid model, where time extensions will be applied for opening and mid-day auction routines, and a 10 per cent price collar introduced for the closing routine.
Price collars are used by exchanges in the United States, Japan, South Korea and Hong Kong. Time extensions are used in Europe, the SGX said.
Feedback can be made until Aug 15 and changes will be implemented if the controls are deemed feasible.
SGX head of regulatory development and policy Chew Chin Yee said: "What we are proposing will involve quite an extensive amount of system changes so... we need to see, industry-wide, how long they will need to make the changes, if they are necessary."
