One major Asian stock exchange operator is preparing to install volatility bands to help maintain market stability during times of distress.
Next year the Hong Kong Stock Exchange will employ upper and lower limits or bands on volatility, according to officials at the exchange operator. It will also begin having a closing auction – which takes the marketplace closer in structure to its Western brethren.
U.S. and European exchange operators enacted price limits and bands in response to the May 2010 Flash Crash.
HKEx said it plans phase in the bands and auction process in order to give market participants time to adjust technology and prepare personnel.
Back in March, the exchange operator published its consultation conclusions on the proposed introduction of the bands – formerly known as the Volatility Control Mechanism (VCM) to safeguard its securities and derivatives markets and a Closing Auction Session (CAS) in its securities market to facilitate trade execution at securities’ closing prices.
HKEx received responses from a broad spectrum of key users of the securities and derivatives markets in Hong Kong including 41 HKEx Exchange Participants contributing 65 per cent and 74 per cent of securities and derivatives market turnover respectively, 15 major global and local asset management companies representing the interests of millions of individual investors in Hong Kong, 10 major industry associations and key market representatives, two major index companies, three other corporate entities and 310 individuals.
Having carefully considered the responses and the rationales behind them, HKEx concluded that there is substantial market support for the introduction of a VCM and a CAS in the Hong Kong market, and it will proceed with the implementation of the two initiatives.
“We are pleased that the majority of respondents from the various market segments supported the implementation of the two market microstructure reforms, which will put us on par with other leading exchanges,” said HKEx’s Head of Market Operations Roger Lee at the time. “We analyzed all market feedback, including the reasons given by those who did not support the proposals, and have enhanced our VCM and CAS models to address the key concerns that were raised. The market will be given an adequate lead time of one year to prepare for the implementation of these two initiatives.”
