Hong Kong said to mull circuit breakers as plunge protection

Mistakes in China spurred action

Hong Kong Exchanges & Clearing Ltd. is studying whether the world’s fourth-largest stock market needs circuit breakers to prevent trading errors from causing large declines or surges in prices, according to a person familiar with the matter.

A committee has been formed by the Hong Kong-based bourse and is in the early stages of its evaluation, said the person, who asked not to be named because the matter is private. No decision has been made on introducing the curbs, the person said. Hong Kong Exchanges hasn’t reached any conclusions on circuit breakers, said Lorraine Chan, an exchange spokeswoman who declined to comment on whether a committee was formed.

Exchanges have responded to the increased automation of trading by introducing curbs to prevent mistaken transactions from influencing prices. U.S. equity markets are now protected by a system known as limit up/limit down, which prevents trades outside certain price bands. Chicago-based CME Group Inc., owner of the world’s biggest futures market, pauses trading during extreme volatility. Singapore Exchange Ltd. plans to add circuit breakers this year, while Hong Kong’s securities regulator implemented rules for brokers and money managers on Jan. 1 designed to reduce risks tied to electronic trading.

“Risk controls implemented at the individual participant level cannot substitute for exchange-level risk controls such as circuit breakers,” Gabe Butler, the head of electronic trading sales for Asia at Morgan Stanley, said in a telephone interview. “We have discussed these ideas with exchanges, including the Hong Kong exchange.”

China’s Errors

Hong Kong Exchanges said in April that it didn’t plan on introducing circuit breakers, rebuffing a 2012 request from 25 market participants. Since then, its neighbor in China has seen two high-profile mistakes: an Aug. 16 error at Everbright Securities Co. that spurred a more than 6 percent swing in the Shanghai Composite Index, and orders to sell on Dec. 20 that caused shares to plunge.

The Hong Kong bourse operator’s shares rose 1.1 percent to HK$127.80 today, compared with a 0.5 percent gain in the benchmark Hang Seng Index. The company’s stock lost 2 percent last year.

U.S. exchanges introduced volatility curbs after the stock- market plunge known as the flash crash in May 2010, which erased more than $800 billion of value in minutes.

Singapore Proposal

Singapore’s proposal involves halting a security for 5 minutes if it fluctuates 10 percent in either direction. The move by Southeast Asia’s biggest bourse came after a plunge in shares of three companies erased $6.9 billion in market value over three days in October.

South Korea’s Financial Services Commission plans to revise its upper and lower limits for derivativestrading and will ask brokerages to take steps to prevent erroneous orders, the regulator said in e-mailed statement today.

“While we apply our own comprehensive risk controls, it’s only the central venue that is in a position to manage the impact when multiple participants execute on a venue and their combined activity affects a particular stock or the market,” Butler said.

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