HKEX.com – Hong Kong Exchanges and Clearing Limited (HKEX) is set to roll out its Volatility Control Mechanism (VCM) – a measure designed to protect market integrity by preventing extreme price volatility arising from major trading errors and other unusual incidents – in its securities market on Monday, 22 August 2016.

HKEX proposed the VCM in a consultation paper after the G20 and the International Organisation of Securities Commissions issued guidance on implementing control mechanisms in trading venues to deal with systemic risks arising from volatile market situations.  Based on the consultation feedback, HKEX decided to proceed with implementation of the VCM after concluding that there was substantial market support for its proposal.  HKEX also used suggestions in responses to the consultation paper to fine-tune a number of features of the VCM model.

Many international exchanges have a mechanism to control extreme price volatility.  In the case of HKEX’s VCM, a simple and light-touch model was chosen after extensive consultation with market participants, with a view towards protecting investors while minimising trading interruptions.

How HKEX’s VCM for its securities market works

• Only applied at the individual security level to Hang Seng Index (HSI) and Hang Seng China Enterprise Index (HSCEI, or H-shares Index) constituents (currently 81 securities)
• An attempt to trade a security covered by the VCM at a price more than 10 per cent away from its last traded price 5 minutes ago will trigger a cooling-off period of 5 minutes where trading of the security can continue but within a band
• Maximum of one trigger per security in each of the two (morning and afternoon) trading sessions
• Cooling-off period does not apply in the opening and closing auctions (9:00 to 9:30 am and 4:00 to 4:08 – 4:10 pm*), the first 15 minutes of the morning and afternoon trading sessions (9:30 to 9:45 am and 1:00 to 1:15 pm) and the last 15 minutes of the afternoon session (3:45 to 4:00 pm) to allow free price discovery

“The cooling-off period in the VCM mechanism alerts the market, provides a short time window allowing market participants to reassess their strategies and positions, and helps re-establish an orderly market at times when there is abrupt and drastic price movement for the security concerned,” said Roger Lee, HKEX’s Head of Markets.

“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,” Mr Lee said.  “In cases of price movement driven by fundamentals, there is a 5-minute cooling-off period under the VCM after which trading can continue for the rest of the session without further intervention.

“Our light-touch approach is also evidenced by back-test statistics for the past 10 years, which show triggers would have been very infrequent if we’d had a VCM.  Given that the VCM is designed to safeguard the market from extreme price volatility arising from major trading incidents, market participants should not expect it to take effect very often and should continue to exercise due care and remain cautious in their trading.”

The VCM is scheduled to be rolled out in HKEX’s derivatives market in the fourth quarter of this year.  It will apply only to the spot month and next calendar month contracts in the HSI, Mini-HSI, H-shares Index (HHI) and Mini-HHI futures markets (a total of eight contracts).