- Consultation concludes that Pre-Opening Session (POS) and Volatility Control Mechanism (VCM) enhancements will benefit market
- Separate rollouts planned for 2020 for the two enhancement programmes
Hong Kong Exchanges and Clearing Limited (HKEX) published today (Friday) its consultation conclusions on the proposed enhancements to the Pre-Opening Session (POS) and Volatility Control Mechanism (VCM) in its securities market.
The enhancements to the POS auction mechanism being proposed involved adopting relevant features from the Closing Auction Session (CAS), which were first introduced in 2016, to help improve price discovery and increase trading liquidity before the market opens. The proposed VCM enhancements outlined expanded stock coverage, to further reduce risks caused by individual stocks’ price volatility, reflecting changes in international practice and regulatory guidance.
HKEX received a total of 100 responses from a broad spectrum of Hong Kong securities markets users, including 64 Exchange Participants contributing to 51 per cent of securities market turnover, 7 international and local asset management companies, 6 major industry associations, 2 corporate entities and 21 individuals.
Having carefully considered the responses, HKEX concluded that there is substantial market support for the proposed enhancements of POS and VCM in HKEX’s securities market. As such, HKEX will proceed with the implementation of the two initiatives.
"Improving our market microstructure has been, and will continue to be, a key focus for HKEX. We are pleased that the overwhelming majority of respondents from across the market supported the implementation of the two market microstructure enhancements. These enhancements will help boost liquidity and further Hong Kong’s global market competitiveness," said HKEX’s Head of Markets Wilfred Yiu.
The consultation paper also took the opportunity to solicit market feedback on whether HKEX should consider any market-level volatility controls, such as a market-wide circuit breaker (CB), on top of the proposed VCM enhancements. Due to the very mixed responses received on this topic, HKEX concluded that no immediate decision on implementing a CB should be made at this stage.
The consultation paper and consultation conclusions are available on the HKEX website along with copies of respondents' submissions.
Final POS and VCM Models
The POS and VCM models to be adopted will be substantially the same as proposed in the consultation paper, with fine-tuning of some features based on market feedback. The fine-tuning includes the following:
POS model features updated to reflect consultation feedback
- Price limit: Instead of exempting stocks which are on their ex-dates from the application of the ±15 per cent price limit as in the original proposal, the ±15 per cent price limit (with reference to the adjusted closing price) will also be applied for these stocks to prevent excessive and unintended price volatility at open; and
- Product coverage: Leveraged and Inverse Products (L&I Products) will also be included in POS for better price discovery and liquidity. Given L&I Products are also funds and they trade in similar ways as Exchange Traded Funds (ETFs), it would be appropriate to include L&I Products in both POS and CAS (i.e. same as ETFs) for trading liquidity and easier communication with investors. To avoid confusion, L&I Products, which are currently not included in CAS, will also be included to CAS when the POS enhancements are implemented to maintain consistency between the two auctions.
VCM model features updated to reflect consultation feedback
- Maximum number of VCM triggers: After the initial VCM expansion, the maximum number of VCM triggers will be kept at ‘one time per trading session’, so that the market has the opportunity to experience and practice the handling of a VCM trigger first. Multiple triggers for each trading session will be implemented six months after the expansion, subject to a brief review of market operations following the VCM expansion; and
- Dissemination of VCM market data: Trigger thresholds applicable for each VCM security will be made available on HKEX website after the VCM expansion.
HKEX will roll out the two initiatives separately: VCM enhancements will be rolled out first; and POS enhancements will be rolled out later, after completing the development and testing of relevant technical changes. Adequate preparation lead-time will be given to the market. The rollout of VCM enhancements is tentatively set for the second quarter of 2020, and that for POS enhancements is tentatively set for the second half of 2020. The timing of both rollouts on Orion Trading Platform—Securities Market (OTP-C) is subject to the required rule amendments and market readiness.
Additional implementation details will be announced in due course.
Hong Kong Exchanges and Clearing Limited (HKEX) is one of the world’s major exchange groups, and operates a range of equity, commodity, fixed income and currency markets. HKEX is the world’s leading IPO market and as Hong Kong’s only securities and derivatives exchange and sole operator of its clearing houses, it is uniquely placed to offer regional and international investors access to Asia’s most vibrant markets.
HKEX is also the global leader in metals trading, through its wholly owned subsidiaries, The London Metal Exchange (LME) and LME Clear Limited. This commodity franchise was further enhanced with the launch of Qianhai Mercantile Exchange, in China, in 2018.
HKEX launched the pioneering Shanghai-Hong Kong Stock Connect programme in 2014, further expanded with the launch of Shenzhen Connect in 2016, and the launch of Bond Connect in 2017.