Circuit breakers have divided the financial community

PUBLISHED : Thursday, 20 February, 2014, 4:39am
UPDATED : Thursday, 20 February, 2014, 4:39am

A heated debate has been rekindled by the Hong Kong stock exchange's decision to consider introducing circuit breakers to prevent split-second computer trading from causing market disruptions or distortions. "Fat-finger" traders who input massive but wrong orders that could temporarily disrupt trading in a market are now far less of a worry than flash crashes caused by computers.

As more trading in stocks and commodities is being done by software programs instead of humans, there is a legitimate concern among regulators and market players about potential disruptions and contagion effects.

One way to cope with the problem is to introduce so-called circuit breakers, which prevent shares prices from plunging or spiking too wildly within a short time. Exchanges in the United States, India, Thailand, Taiwan and the mainland already have such breakers in place. Singapore will introduce them this month. It will suspend a stock for five minutes if its price goes up or down by more than 10 per cent.

The Hong Kong stock exchange has been nothing if not encouraging to large investment houses to introduce algorithmic trading programs into the local market. For example, it allows what is called "co-location", enabling the big players to place their computer servers as close as possible to the exchange's own to facilitate speed trades by milliseconds.

So it makes sense that exchange officials such as its chief executive, Charles Li Xiaojia, should think about the potential danger of flash crashes in the local market.

An exchange-commissioned study is under way. Already, the investment community is split. It appears some institutional investors such as those represented by the Asia Securities Industry and Financial Markets Association are supportive of introducing circuit breakers. However, many of the smaller local brokers are against the move. Perhaps the latter group is unhappy about being unable to trade on high volatilities to make a quick buck. But they do voice a legitimate objection: "If it ain't broke, don't fix it".

Their argument is that markets can take care of such problems. Regulators think something needs to be done. Both sides have a point, which is why the debate needs to be well-aired and the study needs to carefully weigh the pros and cons of circuit breakers for the exchange and the investment community to consider.