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Hong Kong Stock Exchange

New circuit breaker to kick in on Monday on Hong Kong’s bourse

Traders optimistic new measure can avoid the farce that roiled China’s markets in January

PUBLISHED : Friday, 19 August, 2016, 11:25pm
UPDATED : Saturday, 20 August, 2016, 4:38am

Starting on Monday, a new circuit breaker will kick in on the Hong Kong Stock Exchange to smooth out volatility in the stock market.

Traders are optimistic that the new measure, implemented after considerable consultations, will be able to avoid the mess that roiled mainland China’s equity markets in January.

Hong Kong’s “volatility control mechanism” will halt trading in any stock once the price surges or slumps by 10 per cent within 5 minutes, giving traders a 5-minute period to cool off.

Two halts will be activated every day for the 81 stocks of the Hang Seng Index and the Hang Seng China Enterprises Index, also called the H-share index, one halt each for the two sessions for the day.

Hong Kong has been considering mechanisms to reduce volatility as an answer to high-speed algorithmic transactions that can trigger flash crashes, roil markets -- and ruin lives -- when they pour or pull tens of billions of dollars quickly into and out of stocks.

Plans for the circuit breaker had been in the works since at least the middle of 2015, when the Hong Kong exchange made a decision for implementation this year.

Fresh on the minds of the Hong Kong market watchdog and traders is the farce in China’s stock market earlier this year.

An ill-conceived circuit breaker halted trading in the entire market for 15 minutes for two days on January 4 and 7, when the key CSI300 index fell 5 per cent. A subsequent mechanism suspended transactions for the rest of the day when the index decline hit 7 per cent.

The Chinese measures, coming on top of an existing rule that limits the daily rise or fall on any stock to 10 per cent, caused a national panic.

The panic spread to global markets, causing turmoil in stocks in Europe and the US. Before the week was out, an estimated US$2.5 trillion was wiped off the value of global stocks.

Under pressure, China’s securities regulator scrapped the circuit breaker a mere four days after introducing it.

The Shanghai Composite Index tumbled 22.7 per cent, while the Shenzhen Composite Index lost 28 per cent in January, the worst monthly decline since the financial crisis of October 2008.

There’s no cause for concern this time, because the Hong Kong measure is very different from the one in mainland China, said the Hong Kong Securities Association’s chairman Benny Mau.

“The Chinese circuit breaker set a threshold that was too low, and it suspended the whole market,” he said. “The Hong Kong measure will only suspend individual stocks, not the whole market. The Hong Kong threshold is 10 per cent, making it unlikely to trigger the system easily.”

Equity markets in the US, Britain and around Asia have various forms of circuit breakers in place, to address the risks posed to the financial system from potential flash crashes.

The New York Stock Exchange will only suspend the entire market if the benchmark index falls more than 20 per cent, while the London exchange imposes a five-minute halt on stocks with erratic movements.

Still, some traders who call themselves “purists” are opposed to any form of circuit breaker.

“Stock markets are the most efficient pricing mechanisms in the world,” said Capital Link International’s chief executive Brett McGonegal, who opposes having any circuit breaker in Hong Kong. “While it’s always good to continually implement controls that protect investors, the exchange should always be cognizant of the impact that rules have on the delicate nature of simple supply and demand. An overly regulated market runs the risk of pushing investors away as they believe that opportunities are limited.”