Circuit Breakers And Hong Kong Regulation
By Kent Rossiter, Head of Regional Asia-Pacific Trading, Allianz Global Investors
What would you like to see from circuit breakers in Hong Kong? Dynamic, static, market level, instrument level etc.
I’d like exchange circuit breakers to kick in at the single stock level to avoid unwarranted sharp moves which are more often the result of a fat-finger or input error than an intentional action. There may be actual cases where stocks move sharply on actual news, but even in these cases it’s not unusual for the stocks to overshoot because the quote liquidity isn’t heavy enough to take the one-sided and skewed orders. I’m not saying I recommend the Taiwan model of randomised batch-auctions about every ten seconds or so as opposed to continuous trading as done in most exchanges, but it’s a solution worth consideration and backed by some academic studies.
When a stock encounters a sudden sharp move, a cooling off period, say for a few minutes where the stock locks at a price before being allowed to move a few percentage points further, may be a good idea. There’s some debate to determining the right ‘time out’ for traders to pull orders, change limits, or adjust strategies, but it’s probably better to have some rational human thought to the trading instead of it being driven solely by the fastest automated computers in the blink of a second.
Implementing a mechanism so all stocks have the ability to reach clearing prices on exceptional news or in the minutes running up to the market close is a challenge. The eventual solution will probably be dynamic and may use the overall market’s level as a reference point.
How do regional variations affect you?
There’s little conformity among the Asian exchanges now and I don’t think they are going to make effort on circuit breaker uniformity. This is fine with me.
What should be the key considerations for the exchange?
One key function of the exchange should be maintaining orderly markets. So it’s up to the exchange, and the regulator if they want to chip in, to come up with some thresholds for what they consider rational moves in single stock trading. Flash crashes and subsequent cancelling trades on stocks that get crushed or rise too significantly don’t make any exchange look professional.
I think proper controls should be set at the broker level, but it’s more important for the exchanges themselves to also have certain rules that are adhered by all brokers instead of leaving to every brokers own interpretation of what would cause an unorderly market.