Hong Kong exchange to curb volatile stock trading, though not all agree

While the Hong Kong stock market prepares to curb volatility and “fat-finger errors”, not all brokers are happy with the proposed reforms.

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Guanyu said…
Hong Kong exchange to curb volatile stock trading, though not all agree

Enoch Yiu
14 June 2015

While the Hong Kong stock market prepares to curb volatility and “fat-finger errors”, not all brokers are happy with the proposed reforms.

Brett McGonegal, chief executive of financial firm Reorient, is among those who reject the idea of any trading controls.

“I believe the market is the most efficient pricing mechanism in the world and that larger price swings should not be controlled by the exchange,” McGonegal said. “I don’t believe a market participant should be restricted from accessing liquidity at any price.”

The Hong Kong Exchanges and Clearing board is to cast a vote on the largest trading reform in recent years this week, which, if implemented, will mean the city’s stock exchange will introduce trading controls for the first time. HKEx chief executive Charles Li Xiaojia last week said the system may be introduced as early as next year.

The volatility control system proposed by the HKEx in January will bring Hong Kong in line with the international practice of halting stocks moving too quickly. The exchange suggested it introduce a five-minute cooling-off period if the price of any of the 81 constituent stocks of the Hang Seng Index and the H-share index moves up or down 10 per cent from the last trade. One stock would have four such cooling-off breaks a day - twice in each of the morning and afternoon sessions.

The proposed model in Hong Kong is similar to the one in Singapore, which in turn is not as stringent as those in the US and Europe, where the entire market or hundreds of stocks can be suspended in a day if things get too hot. It is also different from the mainland which caps share price movements at 10 per cent in either direction.

Ben Kwong Man-bun, a director of KGI Asia, agreed that Hong Kong should have such a control in place. “High-frequency and electronic trading are on the rise. Any fat-finger error would hurt the market and a cooling off would help,” Kwong said.

On May 6, 2010, a “flash crash” in the S&P 500, Nasdaq 100 and Russell 2000 saw New York stocks plunge almost 1,000 points before they recovered at extraordinary speed in a matter of minutes. It was attributed to high-frequency traders, who had placed tens of thousands of orders online which they then cancelled. But billions of dollars were wiped out in the wild see-saw that ensued.

“Many will argue that ‘fat-finger’ errors would be fewer and controlled with the implementation of volatility restrictions, but I believe those errors should be seen as they are,” McGonegal said.

Brokers also have mixed views on what stocks to be brought under the ambit of the control measures, with many saying all stocks should be covered, rather than the biggest 81, as proposed.

They point out the Stock Connect between Hong Kong and Shanghai since November has brought many mainland retail investors into the local market, adding to the volatility of small stocks. The current HKEx proposal does not cover these stocks.

Hanergy Thin Film Power suspended trading from May 20 after its share price plunged 47 per cent in just 70 minutes of trading. The stock had experienced huge swings before the suspension, rising 664 per cent in the 12 months before the sell-off. The Securities and Futures Commission is investigating the stock.

McGonegal said the Hanergy case shows volatility control may not be a good thing.

“If this stock was held from trading when it was down 10 per cent, then held again when down another 10 per cent, the sellers would have been prevented from accessing the many price levels they were able to without the controls in place,” he said.

“They would have been deprived of transacting with buyers. Conventional wisdom would say that if someone is up to no good, the counter-balance of the rest of the investing world should be able to prevent manipulation.”

Chris Cheung Wah-fung, a broker and lawmaker for the financial services sector, also said small stocks should have no price controls.
Guanyu said…
“I would like to see volatility controls applied only on the large caps and not the small counters,” Cheung said.

“Many retail investors like to trade in speculative stocks. It is their freedom to choose a high-risk-high-returns approach. There should be no restrictions.”

Cheung also thinks the current proposal of having four cooling off periods a day is too much control.

“I believe two cooling off periods a day for each stock and once in each session is good enough to alert investors. Too many such breaks would rob investors of the chance to trade the stocks.”

Asia Securities Industry & Financial Markets Association Managing Director Nick Ronalds said volatility controls are a necessary mechanism in the age of electronic trading.

“In principle, they should apply to all stocks, including small caps. In fact, as we’ve seen just recently, small stocks tend to be more prone to volatility because they’re usually less liquid than bigger-cap stocks. So yes, the programme should be expanded to all stocks,” Ronalds said.

“The exchange proposal calls for a maximum of two halts per trading session. We think the principle of volatility control makes sense and that there’s no real reason to limit them to two or any other arbitrary number.”

Kent Rossiter, head of trading, Asia Pacific, at Allianz Global Investors, said he also believed volatility controls should apply to all stocks. “I’m fine with the proposal of four 5-minute halts per day. This will allow market participants to reassess their strategies and reset any algorithm parameters,” Rossiter said.

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