Tick Rule amendments to take effect on 3 December aim to help improve market liquidity by reducing additional risk to index arbitrageurs and market makers under extreme market conditions, ultimately benefiting all market participants.

The initiative was developed based on market input and has been approved by the Securities and Futures Commission.

Under the Tick Rule, a short sale shall not be made below the best current ask price. In effect, this makes it difficult to short sell in a falling market. However, the Tick Rule may inhibit index arbitrage and market making activities which play an important role in generating market liquidity. When an index futures price deviates from its fair value, an index arbitrageur would seek to take advantage of the price discrepancy by taking positions in the stock and futures markets. These activities would diminish pricing anomalies between stocks and futures. Market maker activities are instrumental in the development of new products or products with low market participation by providing bid and ask quotes to improve liquidity.

Tick Rule Exemption will apply to index arbitrage transactions carried in the proprietary account of a Stock Exchange of Hong Kong or Hong Kong Futures Exchange Participant or an associated company.

Similarly, Tick Rule Exemption will apply to stock futures market makers who may need to short sell in the cash market for hedging purposes.

Also effective 3 December, the requirement for market makers of stock options to submit evidence in respect of short sell transactions in excess of the daily limit of $30 million will be removed. This will reduce the administrative burden on stock options market makers.

A spokesman for Hong Kong Exchanges and Clearing said although the Tick Rule might reduce downward pressure on the stock market under extreme market conditions, it also posed additional risk to index arbitrageurs and market makers who undertook neutral transactions. The implementation of the Tick Rule Exemption is aimed at reducing this risk and further improving the market liquidity.