HKEx studies measures to prevent wild fluctuations

PUBLISHED : Thursday, 16 January, 2014, 2:37am
UPDATED : Thursday, 16 January, 2014, 2:37am

Hong Kong Exchanges and Clearing (HKEx) is studying whether the city's stock market needs circuit breakers to prevent trading errors from causing large declines or surges in prices, a source said.

A committee formed by HKEx was in the early stages of its evaluation, the source said, adding that no decision had been made on introducing the curbs.

Exchange spokeswoman Lorraine Chan Hong declined to comment on whether a committee had been formed and said HKEx had not reached any conclusions on circuit breakers.

Exchanges have responded to the increased automation of trading by introducing curbs to prevent mistaken transactions from influencing prices. US equity markets are now protected by a system known as limit up/limit down, which prevents trades outside certain price bands. Chicago-based CME, owner of the world's biggest futures market, pauses trading during extreme volatility.

Singapore Exchange plans to add circuit breakers this year, while Hong Kong's securities regulator implemented rules for brokers and money managers from the start of this year designed to reduce risks tied to electronic trading.

"Risk controls implemented at the individual participant level cannot substitute for exchange-level risk controls such as circuit breakers," said Gabe Butler, the head of electronic trading sales for Asia at Morgan Stanley. "We have discussed these ideas with exchanges, including the Hong Kong exchange."

HKEx said in April that it did not plan on introducing circuit breakers, rebuffing a 2012 request from 25 market participants. Since then, neighbouring mainland markets have seen two high-profile mistakes: an August 16 error at Everbright Securities that spurred a more than 6 per cent swing in the Shanghai Composite Index, and orders to sell on December 20 that caused shares to plunge.

US exchanges introduced volatility curbs after the stock market plunge known as the flash crash in May 2010, which erased more than US$800 billion of value in minutes.

Singapore's proposal involves halting a security for five minutes if it fluctuates 10 per cent in either direction. The move by Southeast Asia's biggest bourse came after a plunge in shares of three companies erased US$6.9 billion in market value over three days in October.