Active Quote

Active quotes refer to the provision of liquidity where a liquidity provider actively inputs orders into the Exchange’s trading system.

The Industry Principles describe an active quote standard for listed derivative warrants with an active underlying asset, provided certain active quote criteria are met.

For further information, please refer to section 4 of the Industry Principles.

Generally speaking, yes. However, active quotes may not strictly be “continuous” because liquidity providers may need to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Roughly speaking, active quotes should be provided for at least 90% of the time of a trading day for derivative warrants that meet the criteria for active quotes and each pause should not exceed 10 minutes.

No. Unlike quote request, there is no minimum holding time for active quotes.

Issuers are only required to provide active quotes during the “Qualified Period”. This means the period when:

(a)  the active quote criteria set out in paragraph 4.2 of the Industry Principles are met; and

(b)  none of the exemptions set out in paragraph 3.3 of the Industry Principles applies.

Issuers are only committed to providing active quotes for derivative warrants that satisfy the following criteria (as measured on a real time basis):

(a)  an active underlying;

(b)  50% or less of their aggregate number outstanding in the market;

(c)  remaining time to expiry of at least 30 calendar days (for instance, if the expiry date of the warrant is 2 January 2013, active quote should be provided by the liquidity provider up to and inclusive of 3 December 2012) ;

(d)  moneyness between 20% in-the-money and 20% out-of-the money. “Moneyness” is derived by comparing the spot price or level of the underlying and the exercise price or strike level.

For further information, please refer to paragraph 4.2 of the Industry Principles.

A liquidity provider’s quotation for derivative warrants must be based on the actual market conditions. There are three key considerations for an issuer when deciding if active quotes can be provided:

(a)  if the derivative warrant is suitable in terms of demand and risk management;

(b)  if the market conditions affecting the underlying asset, such as its liquidity and the availability of hedging, permit active quotations; and

(c)  the prevailing market conditions affecting the derivative warrant itself, such as supply and demand patterns.

An “active underlying” means local indices (such as the Hang Seng Index and Hang Seng China Enterprises Index) and stocks listed on the Exchange which are eligible for CBBC issuance. These represent stocks with the highest turnover in the market.

CBBC eligible list is generally updated on a quarterly basis and posted on HKEX’s website.

Investors should pay attention to the change in the eligible underlying and the effective date of the eligible list. An underlying previously eligible for CBBC issuance and is removed from the current eligible list will no longer be an “active underlying”. As a result, derivative warrants with that particular underlying will cease to be subject to active quotes commencing on the effective date of the eligible list.

On the other hand, a newly added eligible underlying will become an “active underlying” and will be subject to active quotes commencing on the effective date of the eligible list (assuming the criteria for active quotes set out in paragraph 4.2 of the Industry Principles are all met).

If you want to know whether a particular derivative warrant is eligible for active quotes at any particular time on a trading day, you may contact the issuer to ask if such derivative warrant meets the active quote criteria.

The list of derivative warrants which were eligible for active quotes based on market data as of close of trading on a trading day will be included in each issuer’s daily trading summary published on the next trading day. If you wish to use such market data as a general reference point, please note that such data of derivative warrants is historical.

Such information included in an issuer’s daily trading summary will only show historic data as of the close of trading on the previous trading day for general guidance only. You must not assume that such information is accurate, complete or up-to-date. You should not rely on such historic list as an indication that a derivative warrant listed in such daily trading summary actually meets the active quote criteria at any other time.

The time value of a derivative warrant erodes rapidly towards expiry, making it more difficult to provide active quotes. Active quotes are therefore only able to be provided for a derivative warrant the value of which is not materially affected by the erosion of its time value.

“Moneyness” describes where the derivative warrant’s exercise price or strike level is in relation to the price or level of the underlying asset.

In the case of a call warrant, if the exercise price or strike level is:

(a)  above the price or level of the underlying asset, the warrant is said to be “out-of the-money”; or

(b)  below the price or level of the underlying asset, the warrant is said to be “in-the money”.

Numerically, moneyness of a call warrant is calculated by reference to the difference between the underlying asset’s price or level and the exercise price or strike level, divided by the underlying asset’s price or level, as illustrated in the table below.

In the case of a put warrant, if the exercise price or strike level is:

(a)  below the price or level of the underlying asset, the warrant is said to be “out-of- the-money”; or

(b)  above the price or level of the underlying asset, the warrant is said to be “in-the money”.

Similar to a call warrant, the moneyness of a put warrant is calculated by reference to the difference between the exercise price or strike level and the underlying asset’s price or level, divided by the underlying asset’s price or level, as illustrated in the table below.

Active quotes may not be continuous because liquidity providers may need time to pause the provision of active quotes for a reasonably short period of time to adjust quote parameters in response to market conditions or operational needs.

Common causes of these short interruptions include the following:

(a)  a sudden or material change in the trading pattern of the derivative warrant, such as where a relatively inactive derivative warrant suddenly becomes active;

(b)  news is published that might have an impact on the market price of the underlying. For example, a change in forecast earnings or proposed dividends;

(c)  the underlying or the stock market experiences exceptional price movement or high volatility over a short period of time which materially affects the liquidity provider’s ability to source a hedge or unwind an existing hedge;

(d)  the underlying stock trades at a wider bid-ask spread than normal which causes the spread in the derivative warrant to exceed the maximum level specified in paragraph 4.9 of the Industry Principles;

(e)  the liquidity provider reasonably suspects any potential mispricing, system issue or error;

(f)  the liquidity provider reasonably suspects abnormal trading in respect of the underlying;

(g)  operational and technical problems such as computer network disconnection, loss of data feed, loss of connectivity with the Exchange or technical issues which arise in the issuer’s computer system; or

(h)  the liquidity provider will suffer, or expects to suffer, a financial risk due to frequency of trades and quantity of trades in relation to its derivative warrant.

An issuer may stop providing active quotes for a derivative warrant on a trading day if that derivative warrant no longer meets the active quote criteria stated in paragraph 4.2 of the Industry Principles. Individual issuers may voluntarily decide to keep providing active quotes, or may switch to providing liquidity on a quote request basis in accordance with the minimum liquidity service levels.

The bid and ask spreads for active quote are tighter than the maximum spreads prescribed for quote request. These tightened spreads are as follows:

Spreads for CBBCs are wider than those for derivative warrants because the price of CBBCs is generally more sensitive to movements in the value of the underlying asset, meaning that it is more costly for the issuer to hedge that underlying asset.

Investors should be aware that standards for active quotes described in the Industry Principles are intended to apply to normal market conditions. Provision of active quotes may be affected where there are abnormal or exceptional market conditions.

Quotes provided by liquidity providers necessarily reflect the liquidity of the underlying securities or indices at any given time. If the liquidity of the underlying is impaired by conditions surrounding a VCM event, or by the VCM itself, the liquidity of the  derivative warrant may be adversely affected in terms of quote size and spread relative to more normal market conditions.

During the 5-minute cooling off period after triggering of the VCM, where issuers’ hedging ability is materially affected due to the uncertainty in the underlying securities or index, it is possible that the minimum service level for active quotes will not be fulfilled, such as no bid-ask quotations, widening of bid-ask spread and reduction in quote size.

Similarly, after the 5-minute cooling off period, liquidity provision may still be affected if issuers continue to experience hedging difficulties. Under such circumstances, Liquidity Providers may not fulfil the minimum service level for active quotes as described in the Industry Principles.

However, issuers will use best efforts to meet quote request requirements.