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HKEX Advocates for Market Microstructure Enhancements
Traders Magazine Online News, August 30, 2019
Hong Kong Exchanges and Clearing Limited (HKEX) recently published a consultation paper on proposed enhancements to the Pre-opening Session (POS) and Volatility Control Mechanism (VCM) in the securities market.
“The two market microstructure proposals aim to boost market liquidity and to enhance global competitiveness of the Hong Kong market,” said Wilfred Yiu, HKEX Head of Markets. “In particular, the enhancements to the Pre-opening Session will help improve price discovery and increase trading liquidity before the market opens. Meanwhile, the Volatility Control Mechanism enhancements will help reduce risks caused by extreme price volatility in individual stocks, and reflect changes in international practice and regulatory guidance.”
Overview of POS Enhancements
The proposal to enhance the POS auction mechanism involves adopting relevant features in the Closing Auction Session, which was introduced in 2016. The proposed enhancements include:
- Adjusting securities coverage to include all equities and funds;
- Introducing randomised auction matching;
- Allowing at-auction limit orders throughout POS;
- Allowing short selling orders with a price not lower than the previous closing price; and
- Setting a two-stage price limit — apply a fixed ±15 per cent price limit1 with reference to the previous closing price during order input period, followed by a second stage price during no cancellation and random matching periods in which order prices will be limited to within the lowest ask and highest bid prices recorded at the end of order input period.
Overview of VCM Enhancements
- Expanding VCM stock coverage from constituent stocks of the Hang Seng Index and Hang Seng China Enterprises Index (80+ stocks) to constituent stocks of Hang Seng Composite LargeCap, MidCap and SmallCap Indexes (total of nearly 500 stocks);
- Applying a tiered structure of triggering thresholds at ±10 per cent, ±15 per cent, and ±20 per cent to the last traded price five minutes ago respectively for the constituent stocks of the three Hang Seng Composite Indexes; and
- Allowing multiple triggers per trading session for each VCM stock.
The consultation paper and questionnaire are available from the HKEX website. Interested parties are encouraged to respond to the consultation paper by 27 September 2019.
1 Under certain scenarios such as IPO stocks, the ±15% price limits will not be applicable.
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