Hong Kong stock exchange to extend circuit breakers to futures products to temper wild gyrations in equities and derivatives

Enoch Yiu
·4-min read

Hong Kong Exchanges and Clearing Limited (HKEX), the market operator, will further expand its circuit-breaker mechanism to temper wild swings in the price of futures contracts in Asia’s third-largest capital market.

The move will add to similar controls put in place since August 2016, first on extreme gyrations in equities and a year later on derivative products. They followed a series of events that provoked regulatory probes into market misconduct such as price manipulation and pump-and-dump scandals.

The new measure, starting from April 12, on the futures market will introduce multiple triggers of five-minute periods for investors to cool off in the event of a sudden jump or tumble in the price of securities, according to an exchange statement. Currently, the circuit breaker is triggered only once every trading session. The multiple-trigger system was earlier implemented for the stock market on March 29.

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“The volatility control mechanism (VCM) has worked as intended without any negative feedback from the market,” said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers, the local brokerage industry body. “In many cases, sharp and sudden price movements were smoothed out as the cooling-off periods allowed participants to react while trading continued.”

HKEX incoming CEO Nicolas Aguzin, the former Asia Pacific chairman and chief executive officer at JPMorgan Chase’s private banking arm. Photo: SCMP/Handout
HKEX incoming CEO Nicolas Aguzin, the former Asia Pacific chairman and chief executive officer at JPMorgan Chase’s private banking arm. Photo: SCMP/Handout

During the cooling off period, the investors can only trade within a 5 per cent limit on either side of the last price before the circuit breaker is triggered, according to HKEX, the world’s biggest exchange operator by market value. The enhancement was made “to better safeguard market integrity,” it added.

The exchange did not have any price control until August 2016, while operators in mainland China, Japan, Singapore and the US markets have had them earlier for decades. The circuit breaker has been triggered 26 times in Hong Kong’s stock market since it was introduced, according to the HKEX, the latest involving sofa maker Kasen International Holdings on March 3. To date, none has been triggered in the derivative market.

Hong Kong’s circuit-breaker system is now more in line with best international market practices, but with some inherent differences, Chan said. In mainland China on the Shanghai and Shenzhen exchanges, a price limit of 10 per cent lock prices within a tight range everyday, while US operators apply a wide system that could halt trading in the entire market.

HKEX adopted a light-touch approach, by first applying the system on only 82 of the biggest stocks on the exchange before widening it 492 in May last year. In the derivative market, it covers eight futures contracts, including those tied to the city’s stock benchmark, the Hang Seng Index.

It will cover the spot month and next calendar month futures contracts on the Hang Seng Index, Mini-Hang Seng Index, Hang Seng China Enterprises Index and Mini-Hang Seng China Enterprises Index, HKEX said.

“The effectiveness of this mechanism in certain situations, such as panic selling, will be relatively obvious,” said Kenny Ng Lai-yin, a strategist at Everbright Sun Hung Kai. “However, if it is a sudden [report of] bad news that causes the fundamentals of individual stocks or the market to change, then even the volatility control mechanism might not prevent [them] from going down further in future.”

Still, the circuit breaker does not apply to many of the 2,000-odd smaller companies on the city’s exchange. This explained why shares of Next Digital Limited were able to surge by 1,200 per cent over two days last August when fans and supporters rallied behind Jimmy Lai to buy the shares of the publisher of Apple Daily newspaper. Hong Kong police arrested 15 people on suspicion of conspiracy to defraud and money laundering by manipulating trading in Next Digital shares.

The Securities and Futures Commission in March also worked with the police to crack down on a suspected “pump-and-dump” scam on social media involving a Hong Kong-listed company. Twelve people were arrested and more than HK$900 million (US$115.8 million) of suspected illegal proceeds were frozen.

“HKEX is committed to ensuring its markets operate in an open, fair and orderly manner, and as part of this we have robust rules and procedures to manage through extreme market volatility,” according to a spokeswoman of the exchange.

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