Hong Kong Regulators Mull Marketwide Circuit Breaker

In a move to bring Hong Kong in line with its global peers and cope with extreme moves in a volatile market, regulators signalled for the first time its intention to introduce a circuit break mechanism in the city’s stock market. 

In its annual report for fiscal year 2018-2019, the Hong Kong Securities and Futures Commission (SFC) said it is working with the Hong Kong Exchange and Clearing (HKEx), operator of the Hang Seng Index, to figure out whether introducing a circuit breaker mechanism would benefit the city or not.

“A public consultation will be conducted by the HKEx in due course,” the report said.

“The circuit breaker could serve as an important tool to combat sudden and sharp price movements in the stock market,” said Ms. Vivian Chui, equity analyst at Hong Kong-based consultancy firm BCP Investment Limited. “I think it is a good thing for Hong Kong overall, as it would bring the city in line with other major financial markets, which all have their own mechanisms to cope with volatile price movements.”

The other guys

In the US, the New York Stock Exchange sets three circuit breaker levels at 7%, 13% and 20%, the exchange will suspend trading if the benchmark S&P 500 Index suffer such drops in value while the London Stock Exchange imposes a five-minute halt on stocks trading erratically. 

However, the circuit breaker in Chinese markets launched in 2016 was scrapped after causing a wave of selling.

Local experience…

The SFC said it is also talking with the HKEx to review its volatility control mechanism (VCM), a stock-specific approach (as opposed to the newly proposed marketwide approach) that was introduced in 2016, in light of the evolving international standards and best practices. 

In August 2016, HKEx launched the VCM that will cool Hang Seng Index and Hang Seng China Enterprise Index constituent stocks for five minutes when there are abrupt price changes (±10%). Only one suspension is allowed in each of the morning or afternoon trading sessions.

In January 2017, VCM in the derivatives market was launched. 

Since the rollout of these mechanisms, there have been no trigger events in the securities and derivatives markets.