HKEX Consultation Paper on Proposal for Introduction of Volatility Control Mechanism in the Securities and Derivatives Markets and Closing Auction Session in the Securities Market
Release Date: 2015-04-10
To: Hong Kong Exchanges and Clearing Limited
Response to the Consultation Paper on Proposal for Introduction of Volatility Control Mechanism in the Securities and Derivatives Markets and Closing Auction Session in the Securities Market
Following the release of your consultation paper in January 2015, which proposes the establishment of a market volatility control mechanism based on a dynamic price limit model in the securities and derivatives markets, alongside a new closing auction session in the securities market, our association wishes to formally present our stance:
Our association firmly opposes the introduction of both the product-level market volatility control mechanism and the new closing auction session model within the Hong Kong securities market.
Concerns on Implementing a Product-Level Market Volatility Control Mechanism Based on a Dynamic Price Limit Model
In response to Question 1 on page 12 of the consultation paper, which asks whether we support the implementation of a product-level market volatility control mechanism based on a dynamic price limit model in Hong Kong, our association's position is unequivocally negative. The rationale includes:
1. Significant division exists within the market.
2. The need to mitigate errors from human input or deliberate market manipulation, which could trigger a chain reaction, warrants further examination.
3. To facilitate normal market operations, it is crucial to impose safeguards against accidental errors and deliberate manipulation. A deviation exceeding 20% should be addressed with composure, potentially through a brief market halt.
4. A single, calming intervention is theoretically adequate. A streamlined process aids in educational and communicative efforts, with a proposed daily 10-minute trading halt sufficing.
5. Given its novelty, the volatility control mechanism lacks practical precedent. Current opinions are largely theoretical and challenging to measure, suggesting a pilot phase to gather empirical insights and evaluate short-term efficacy.
Considering these points, we advise against the premature adoption of a product-level market volatility control mechanism. Consequently, we find further questions (Questions 2 to 17 on pages 13 to 18) irrelevant and decline to respond.
Opposition to Establishing a New Closing Auction Session Model in the Hong Kong Securities Market
Addressing Question 18 on page 29, which inquires about support for a new closing auction session model, our association objects for the following reasons:
1. The closing auction session is intrinsically unfair, unjust, and lacks transparency, expanding the scope for manipulation, harming investors' interests, and skewing closing transaction prices.
2. This model induces inertia, as funds shirk responsibility by mimicking others, concentrating trades at market open and close, diminishing volatility, and adversely affecting trading volumes, which is counterproductive for sustained growth.
3. It introduces market-making opportunities that could lead to financial instability, as evidenced in 2008 when HSBC's price was artificially suppressed to HKD 32, precipitating a severe market downturn.
4. While the auction is inequitable and opaque, it differs from the closing price. Concerns about the closing price should be addressed independently, such as by using the average price throughout the day.
5. Previous attempts at implementing a closing auction resulted in failure. While learning from failure can be constructive, success should derive from enhancing existing, effective market practices.
6. The free-market trading that characterizes Hong Kong as a major financial hub is disrupted by a closing auction session, altering the established market dynamics.
In light of these considerations, our association advises against the introduction of a new closing auction session model. Thus, we see no merit in answering subsequent questions (Questions 19 to 40 on pages 29 to 41).
These perspectives were formulated through a fair and transparent process. We urge your exchange to heed industry feedback and refrain from adopting mechanisms that could undermine Hong Kong's esteemed free and open market reputation.
Sincerely,
Hong Kong Securities and Futures Professionals Association
April 9, 2015