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New mechanism designed to prevent extreme price swings in HK stock market

Reporter: Zhu Dan 丨 CCTV.com

08-22-2016 16:44 BJT

The Hong Kong Exchanges & Clearing Limited will use a process designed to help deal with extreme price swings.

A plan to control volatility in the stock market begins Monday for some of the largest securities traded on the Hong Kong Exchanges & Clearing Limited.

The system restricts a stock from moving more than 10 percent during a five-minute period once a session. The new tool helps to stop what market regulators say are so-called fat fingers from causing extreme price swings.

The mechanism is not intended to control stock prices due to fundamentals. Officials say it should not be confused with the daily price limits that some markets use to keep a stock’s trading within a specific price range.

“For normal investors, it will protect them and help them avoid certain volatile events. For some other traders, that would not be good news,” said Hong Hao, managing director of Bocom International.

The cooling-off period does not apply to the first 15 minutes of the morning and afternoon trading sessions or the last 15 minutes of the trading day.

The new procedure was chosen after extensive consultation with market participants. The new volatility control is similar to the models used by the Singapore Exchange and Tokyo Stock Exchange.

“Last summer’s Asian market turbulence and volatility was unusual. It was a once in a thousand year event. Many exchanges are introducing volatility mechanisms to stablize the market,” Hong said.

The controls may help minimize sudden price swings, but it will not stop trading in a stock or derivative for the day. For example, BYD Company, a Chinese electric-car manufacturer, fell as much as 12 percent in January in Hong Kong trading and closed 10 percent lower from the previous day after it was downgraded by Morgan Stanley.

Analysts believe as long as the control measure does not become intrusive, then it is not a bad thing, because it does give the markets a breather to readjust. 

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