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Monday, August 22, 2016, 16:48

Anti-volatility mechanism rolled out by HKEx

By Oswald Chan

HONG KONG - Hong Kong Exchanges and Clearing Ltd (HKEx) on Monday rolled out the volatility control mechanism (VCM) to prevent extreme price volatility of individual stocks arising from major trading errors and other unusual incidents.

The VCM currently only applies to 81 constituent securities of the Hang Seng Index (HSI) and Hang Seng China Enterprise Index (HKCEI). This new trading mechanism is scheduled to be rolled out in HKEx’s derivative market in the fourth quarter of this year, targeting the other eight related index futures contracts.

VCM will be triggered if a stock veers 10 percent - up and down - from the last traded price recorded at a five minute interval. For index futures contracts, the same mechanism will be triggered if contract prices are up or down five percent from the last traded price five minutes ago.

After the trigger of VCM, a 5-minute cooling off period will start to allow trading within only the band. Normal trading will resume afterwards for the rest of the session without further interve

The mechanism stipulates a maximum of one trigger per security alert in the morning and evening trading sessions within a day.

"The VCM is not intended to limit the ups and downs of stock prices due to fundamentals, and it should not be mistakenly seen as a trading halt mechanism or confused with the daily price limits that some markets use to keep a stock’s trading within a specific price range,” said Roger Lee Kwok-keung, head of markets at HKEx.

HKEx does not expect the VCM to come into effect very often as market statistics reveal such triggers are deployed sparingly.

"If it restricts the wild things then it is great,” said Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong. “As long as it does not become intrusive, then it’ is not a bad thing, because it does give that moment for the market to readjust.”

The change comes after the bourse started a closing auction session on July 25 for the first time in seven years after completing a market consultation last year. The new measure is to meet market demand for trade execution at the closing prices of securities.

The volatility control may help minimize sudden swings in stock prices, but will not stop trading in a stock or derivative for the day. On Jan 7, BYD Co., a mainland electric-car manufacturer, fell as much as 12 percent in Hong Kong trading and closed 10 percent lower from the previous day after it was downgraded by Morgan Stanley.

June 24 was the most volatile trading session for the Hang Seng Index, Hong Kong’s equity benchmark, in a year. The index fell as much as 5.8 percent and rose as much as 0.8 percent in the aftermath of the UK’s vote to leave the European Union.

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