Volatility Control Mechanism (VCM)

Historically different events have driven different VCM model to be chosen in different markets.  Hong Kong has been able to learn from the VCM experience of other markets, and HKEX decided that a light-touch and simple model would be most suitable for Hong Kong’s markets since they’ve never had a VCM and may not be familiar with such mechanisms.  

HKEX’s proposed VCM is specifically designed to safeguard market integrity from extreme price volatility arising from automated trading (“Flash Crash”, bad algorithms, etc.).  It also serves to alert the market with a temporary cooling-off period for the participants to reassess their strategies and positions and make investment decisions.  It is not a trading halt, does not intend to limit the ups and downs of stock prices due to fundamental events, and it also does not work the same way as the daily price limit model which sets a specific daily price range for securities trading as seen in some markets.

Special care has been taken in the VCM design to minimise market interruption.  For example, it applies to individual instrument rather than the entire market, it is based on a dynamic rather than a static reference price, the triggering level (±10% for securities market and ±5% for derivatives market) is set up such that it would not trigger the VCM too often, the VCM is not applicable in certain periods (the first 15 minutes of the morning and afternoon CTS and the last 15 minutes of the afternoon CTS) and to certain instruments, and the fact that a maximum number of triggers per instrument in each trading session (maximum 1 trigger per instrument per CTS) is imposed to prevent excessive trading interruption.

HKEX has adopted a dynamic price limit VCM model for the securities and derivatives markets, which would trigger a cooling-off period in case of abrupt price volatility detected at the instrument level. 

• The VCM is only applicable for board lot order input during the Continuous Trading Session (CTS), but not for any orders input during the Pre-opening Session (POS) and the CAS. 

• During the CTS, the potential trade price of a VCM security will be continuously checked against a dynamic price limit of ±10% based upon the reference price (±5%, for the derivatives market) which is the last traded price 5 minutes ago.

• The VCM is triggered if a stock is ±10% away (or if a futures contract is ±5% away) from the last traded price 5-min ago; A 5-min cooling-off period will start.

• For each VCM instrument, there will be a maximum of one VCM trigger in each trading session (Morning Session and Afternoon Session are counted as two separate trading sessions). 

• Normal trading without restriction will resume on the VCM-triggered instrument after the cooling-off period.  There will not be any VCM monitoring on the VCM-triggered instrument within the same trading session.

For the securities market, the VCM would cover Hang Seng Index (HSI) and Hang Seng China Enterprise Index (HSCEI) constituent stocks (as of 31 July 2016 there are 81 such stocks listed on the Stock Exchange of Hong Kong).

The finalized list of the VCM securities would be published on the HKEX website before the launch of the VCM.  Any addition of constituent stocks to the HSI or HSCEI subsequently will also be added to the list of VCM securities on the effective date of the addition.  Similarly, any deletion of constituent stocks from the HSI or HSCEI will also be removed from the list VCM securities on the effective date of the deletion.

For the derivatives market, the VCM would cover spot and next calendar month index futures contracts with HSI or HSCEI as their underlying index (currently 8 futures contracts).

HKEX currently has no plan to include more instruments in the securities or derivatives markets which would be subject to the VCM.  

VCM monitoring is applicable to continuous trading session (CTS), excluding:        

• the first 15 minutes of the morning and afternoon trading session
• the last 20 minutes[1] of the afternoon trading session
• the After-Hours Futures Trading session in the derivatives market

The 24 spreads rule, the 9 times rules, as well as the existing price warning mechanism would continue to be applicable during the cooling-off period.

The issuer will commit to Quote Request obligations during the day, including during the cooling off period, unless an exemption is obtained for Quote Request.

A message will be broadcasted in OTP-C or HKATS when the cooling-off period is triggered for the specific securities or futures contract. Information includes: the start time and end time of cooling-off period, reference price and price limits of the securities or futures contract during the cooling-off period.

Since the information of cooling-off period’s end time has already been included in the message when cooling-off period is triggered, there will be no additional message broadcasted at the end of cooling-off period.

For each cooling-off triggered by the VCM, a VCM Trigger (23) message would be disseminated in OTP-C when the cooling-off period begins for specific securities or futures contract. The message provides, among other related information, both the start time and end time of the cooling-off period. There would be no other messages to indicate the end of the cooling-off period.

In general, the VCM Trigger (23) message is available in Refresh Channel for each cooling off period triggered in a day except when the same security has more than one cooling off period triggered for the day.  In this exceptional case, only the VCM Trigger (23) message for the latest cooling-off period would be found in Refresh Channel for that security.

Only 8 contracts, namely HSI Futures (HSI), Mini-HSI Futures (MHI), H-shares Index Futures (HHI) and Mini H-shares Index Futures (MCH) spot month and the next calendar month contracts are covered in the VCM for the derivatives market.  Therefore if the Market State “OPEN_DPL_VCM” or “OPEN_VCM” is received for a market, an instrument type or a class, it does not necessarily mean that all series within that market/instrument type/class are eligible for VCM.

The information of a VCM cooling off period is provided in two Market Alert (323) messages in a structured manner so as to facilitate retrieval of the information including the start time, end time, reference price, upper and lower price limits. For details, please refer to OMD-D Developers Guide.

Only 8 contracts, namely HSI Futures (HSI), Mini-HSI Futures (MHI), H-shares Index Futures (HHI) and Mini H-shares Index Futures (MCH) spot month and the next calendar month contracts are covered in the VCM for the derivatives market.  Therefore if the Market State “OPEN_DPL_VCM” or “OPEN_VCM” is received for a market, an instrument type or a class, it does not necessarily mean that all series within that market/instrument type/class are eligible for VCM.

The information of a VCM cooling off period is provided in two Market Alert (323) messages in a structured manner so as to facilitate retrieval of the information including the start time, end time, reference price, upper and lower price limits. For details, please refer to OMD-D Developers Guide.