Hong Kong Said to Evaluate Safeguard From Market Plunges

January 16, 2014 Leave a comment

Hong Kong Said to Evaluate Safeguard From Market Plunges

Hong Kong Exchanges & Clearing Ltd. is studying whether the world’s fourth-largest stock market needs circuit breakers to prevent trading errors from causing large declines or surges in prices, according to a person familiar with the matter.A committee has been formed by the Hong Kong-based bourse and is in the early stages of its evaluation, said the person, who asked not to be named because the matter is private. No decision has been made on introducing the curbs, the person said. Hong Kong Exchanges hasn’t reached any conclusions on circuit breakers, said Lorraine Chan, an exchange spokeswoman who declined to comment on whether a committee was formed.

Exchanges have responded to the increased automation of trading by introducing curbs to prevent mistaken transactions from influencing prices. U.S. equity markets are now protected by a system known as limit up/limit down, which prevents trades outside certain price bands. Chicago-based CME Group Inc., owner of the world’s biggest futures market, pauses trading during extreme volatility. Singapore Exchange Ltd. (SGX) plans to add circuit breakers this year, while Hong Kong’s securities regulator implemented rules for brokers and money managers on Jan. 1 designed to reduce risks tied to electronic trading.

“Risk controls implemented at the individual participant level cannot substitute for exchange-level risk controls such as circuit breakers,” Gabe Butler, the head of electronic trading sales for Asia at Morgan Stanley, said in a telephone interview. “We have discussed these ideas with exchanges, including the Hong Kong exchange.”

China’s Errors

Hong Kong Exchanges said in April that it didn’t plan on introducing circuit breakers, rebuffing a 2012 request from 25 market participants. Since then, its neighbor in China has seen two high-profile mistakes: an Aug. 16 error at Everbright Securities Co. that spurred a more than 6 percent swing in the Shanghai Composite Index, and orders to sell on Dec. 20 that caused shares to plunge.

U.S. exchanges introduced volatility curbs after the stock-market plunge known as the flash crash in May 2010, which erased more than $800 billion of value in minutes.

Singapore’s proposal involves halting a security for 5 minutes if it fluctuates 10 percent in either direction. The move by Southeast Asia’s biggest bourse came after a plunge in shares of three companies erased $6.9 billion in market value over three days in October.

“While we apply our own comprehensive risk controls, it’s only the central venue that is in a position to manage the impact when multiple participants execute on a venue and their combined activity affects a particular stock or the market,” Butler said.

To contact the reporter on this story: Eleni Himaras in Hong Kong at ehimaras@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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