Rules to rein in stock market volatility in Hong Kong will benefit small investors

PUBLISHED : Wednesday, 17 June, 2015, 1:25am
UPDATED : Wednesday, 17 June, 2015, 1:25am

In an age of volatile computerised trading, small investors need all the protection they can get.

New measures to be introduced by Hong Kong Exchanges and Clearing (HKEx) to control trading volatility - and price discovery at the end of a trading day - are therefore welcome.

A confluence of factors is making trading more unpredictable in the local markets. Chief among these are the introduction of the Shanghai-Hong Kong Stock Connect scheme, soon to be joined by Shenzhen, and new technologies such as algorithmic and high-frequency trading.

The new scheme aims to prevent individual equities from moving more than 10 per cent within a five-minute period from early next year. This is to protect retail investors from sharp price gyrations. For example, a trader who sends an execution trade order at a price 10 per cent up or down from a stock price will be rejected.

While Hong Kong has not had a "flash crash" like that on May 6, 2010, in New York when the Dow Jones Industrial Average lost nearly 1,000 points in less than 30 minutes, precautions should be taken.

On March 9, 2009, the share price of HSBC dropped 11 per cent within a few seconds. That incident unnerved many investors and became a trigger to push HKEx to study new mechanisms to curb volatility.

Meanwhile, a second scheme by the HKEx is to reintroduce a closing auction session to decide a stock's closing share price. This would enable brokers to place orders within a few minutes of the market close, with the closing price decided by those placements.

This has been a long time coming as our city is one of the few markets without a closing auction, along with India, Egypt and Shanghai.

By moderating volatility and enhancing the speed of price discovery, the new mechanisms should make the markets function more efficiently and help cut costs for ordinary investors.