HK bourse seeks to limit market volatility and improve price discovery by proposing two new systems in 2016

The Hong Kong Stock Exchange has introduced new rules aimed at limiting market volatility and re-introduced the closing-auction mechanism to improve price discovery.

Charles Li Xiaojia, chief executive of Hong Kong Exchanges and Clearing Ltd (HKEx), said that the market has reached consensus on the proposals which will be implemented in the second half of 2016, and the results will be announced at the beginning of next month."The HKEx will also constantly monitor market changes in order to ensure the safety of the operation of the two (proposed) systems," said Li.

Meanwhile, local media reported on Thursday that the board of directors of HKEx has already given the green light to the implementation of the two systems, Volatility Control Mechanism (VCM) and Closing Auction Session (CAS).

The reports also said that Li has assured HKEx's board that preparation works for the Shenzhen-Hong Kong Stock Connect is underway in an orderly manner, and it will be launched as scheduled.

As VCM and CAS will only be introduced next year, it would give HKEx enough time to make the necessary changes to its current trading system to ensure that stock brokers would be well prepared for the new systems.

HKEx's consultation paper mentions that introducing the two systems can help it better monitor and regulate stock price fluctuations, as well as to enhance the closing mechanism to meet the market needs of execution at closing prices.

The purpose of the VCM is to prevent individual shares from rising or sliding more than 10 percent within a five-minute period. When such a situation happens, a five-minute cooling-off session will be triggered before trading is resumed.

The mechanism will cover all the 81 constituent stocks of the benchmark Hang Seng Index and the Hang Seng China Enterprises Index.

Wide swings in share prices in the Hong Kong stock market have become more often in recent months, causing growing concern to traders and regulators. The issue was brought to the forefront by the price collapse of the stocks of Hanergy Thin Film Power Group Ltd last month.

The CAS system was first introduced in May 2008. But it was suspended 10 months later when a flaw in the system was exposed by an 11 percent plunge in the share price of HSBC in the last few seconds of the auction session.

To discourage price manipulation, the new proposal seeks to impose a 5 percent limit on price swings either way during the auction session, as well as a two-minute random closing period.

It has also proposed to implement the system in two phases. Phase one will include around 280 major index constituent stocks and about 40 exchange-traded funds that track Hong Kong stocks.

The present closing mechanism on the Hong Kong stock exchange is to take the median price of the last five orders of the stock.

Li also mentioned on Thursday that HKEx would soon publish the updates on its consultation on dual class share structure. The issue has been on the exchange's agenda since mainland Internet giant Alibaba Group Holding Ltd picked New York over Hong Kong for its mega IPO.

agnes@chinadailyhk.com

The Hong Kong Stock Exchange plans to introduce Volatility Control Mechanism and Closing Auction Session to better monitor and regulate stock price fluctuations and improve price discovery. It also proposes to publish the updates on its consultation on dual class share structure. Parker Zheng / China Daily

(HK Edition 06/19/2015 page9)