HKEx to put in system to fight algo and high-frequency trading in Hong Kong
The stock exchange will prevent individual equities from moving more than 10 per cent within a five-minute period from as early as next year to check the activities of high-frequency traders, who have wreaked havoc in other financial markets, Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia said on Thursday.
The volatility control mechanism it plans to implement is aimed at protecting investors from the sharp gyrations caused by algorithmic and high-frequency trading, which has whipsawed other financial markets and caused billions of dollars in losses.
HKEx, which operates the city's stock exchange, released a consultation paper in January to seek market participants' views about the model. Li said after attending a forum in Hong Kong on Thursday that a consensus had been reached and the results would be published by the end of this month.
On March 9, 2009, the share price of HSBC dropped 11 per cent within a few seconds and that became a trigger to push HKEx to study a new pricing model to restore investor confidence.
In its consultation paper, HKEx proposed that if a trader sent an execution trade order at a price 10 per cent up or down from a stock price, the order would be rejected and a five-minute cooling period would begin.
"Although the Hong Kong market has not had any major trading incident of a 'flash crash' nature up to now, the risk of future mishaps cannot be ruled out," it said in the consultation paper.
On May 6, 2010, a "flash crash" in New York saw the Dow Jones Industrial Average lose nearly 1,000 points in less than 30 minutes.
High-frequency traders placed tens of thousands of computer orders which they cancelled later, with the volatile trading temporarily wiping out about US$1 trillion in paper value in the US stock market.
The January consultation paper also included a proposal to establish a long-awaited closing-auction session to decide a stock's closing share price, which would enable brokers to place orders within a few minutes of the market close, and with the closing price decided by those placements. Hong Kong is one of the few markets without a closing auction, along with India, Egypt and Shanghai.
Hong Kong Investment Funds Association chief executive Sally Wong welcomed the new mechanisms and said they "could potentially lower the transaction costs for execution and be conducive to price discovery".
Separately, Li said there was no doubt mainland Chinese A shares would be eventually included in MSCI's benchmark emerging-markets index, and all that remained was how soon that would happen and how much weight they would be given in the index, which is tracked by big funds. Meanwhile, he refused to be pinned down on the timing of the launch of the Shenzhen-Hong Kong stock connect scheme.
The northbound quota under the stock connect scheme would be removed eventually, he said, which could help boost A shares' chances of joining the MSCI index.
The index compiler deferred a decision of the inclusion of A shares this week due to concerns about investors' access to mainland Chinese markets.