HKEX set to launch circuit breaker to control volatility

The Hong Kong stock market is likely to open higher on Monday after futures rose in pre-trading.

Market watchers were also optimistic about the launch of a new circuit breaker system that suspends stocks for five minutes in the event of abnormal price movements.

The Hang Seng Index futures spot August contract had risen 0.34 per cent or 78 points to 22,990 in the pre-trade session by 8.55am on Monday morning, while the Hang Seng China Enterprises Index futures dropped 0.22 per cent or 21 points to 9,554.

Today will be the first day Hong Kong Exchanges and Clearing introduces a circuit breaker, which the exchange officially calls a volatility control mechanism.

The cooling-off period in the mechanism will alert the market, provides a short time window allowing market participants to reassess their strategies and positions, and helps re-establish an orderly market if there is abrupt and drastic price movement.

Brokers say since the Hong Kong circuit breaker threshold is very relaxed compared with worldwide standards, they are optimistic there will be little chance of Hong Kong repeating China’s chaotic scenes in January this year, when it launched its own circuit breaker.

In Hong Kong the exchange will have a five-minute suspension in trading if any of 81 constituent stocks in the Hang Seng Index and Hang Seng China Enterprises Index rise 10 per cent in five minutes.

The Chinese system was designed to be triggered if the CSI300 index, which that tracks large cap stocks listed in Shanghai and Shenzhen, falls or rises by 5 per cent, bringing the whole market to a halt for 15 minutes. It would be suspended for the rest of the trading day if the rise or decline reached 7 per cent.

But that system was scrapped only four days after launch and shut down between January 4 and January 7. The following meltdown caused the Shanghai Composite Index to fall by 22.7 per cent, its worst monthly performance since October 2008. The Shenzhen Composite Index has lost 28 per cent in January.

Experts sad the problem with China’s circuit breaker was that the threshold had been set too low and was easily triggered. The closure of the entire market rather than the stock involved was another problem.

The 5 per cent threshold for China’s circuit breaker is lower than 7 to 13 per cent range used in the US which suspends the market for 15 minutes if such a movement happens. It would require a swing of 20 per cent for the whole US market to be closed for the day.

“Hong Kong will not repeat the chaos in China because the circuit breaker in China suspended the whole market which is different from Hong Kong which will only suspend individual stocks while the threshold is very high in Hong Kong,” said Benny Mau, chairman of Hong Kong Securities Association.

All three major US indices closed up on Friday with the Dow Jones Industrial Average finishing 0.24 per cent lower at 18,552.57 and the S&P 500 down 0.14 per cent to 2,183.87. Meanwhile, the Nasdaq Composite down 0.03 per cent at 5,238.38.

Analysts said the US stocks had dropped over concerns on the global central banking conference in Jackson Hole Symposium to be held by Federal Reserve this week.

The highlights of the meeting will be a speech on Friday to be given by Federal Reserve chairwoman Janet Yellen with market watchers waiting for hints about the chance for a rate hike this year.

In Asian trading on Monday early morning, Tokyo’s Nikkei 225 gained 0.13 per cent at 16,567.63, South Korea Kospi down 0.21 per cent while Sydney All Ordinance dropped 0.03 per cent to 5,623.50.

There was a mixed performance by Hong Kong-listed companies with American Depository Receipts (ADRs) traded in the US. Some saw higher and some saw lower than their equivalent Hong Kong closing prices on Thursday after conversion into the local currency.

HSBC’s ADR closed at HK$55.43 down from the HK$54.90 seen at the Hong Kong close, Sinopec’s ADR increased to HK$5.64 closed in the US from HK$5.62 seen at the Hong Kong close, and China Mobile ADR dropped to HK$98.56, from HK$98.7 in Hong Kong close.

There are several major listed companies releasing results on Monday, including Hong Kong & China Gas, railway firm CRRC, property developer K Wah.

(SOUTH CHINA MORNING POST)