Photo/Shetuwang

May 16 (NBD) -- Hong Kong Exchanges and Clearing Limited (HKEx) is studying and consulting opinions on a circuit breaker system that suspends trading including spot and futures transactions in the event of wild fluctuations of the Hang Seng Index, according to a report by Hong Kong-based Oriental Daily News.

National Business Daily noticed that globally, almost all major markets have introduced market fluctuation adjustment mechanisms in different forms to tame extreme price volatility. 

In mainland China, two thresholds of swing in the CSI 300 benchmarket index will trigger circuit breakers: 5 percent and 7 percent.

Without similar mechanism, heavyweight investors might take advantages of the dramatic fluctuations to rake in huge profits when other major markets worldwide suspend trading in extreme fluctuation cases, according to the report.

When reached by Securities Times, HKEx neither admitted nor denied the report, only saying it is discussing with the industry veterans all possible measures for market microstructure improvement, but the discussions are still in the preliminary stage. 

The company will continue to press ahead with the close cooperation with the industry practitioners to guarantee the healthy market development in the long run and cement Hong Kong's profile as the international financial center, HKEx added. 

Several sources with investment banks told Securities Times that the circuit breaker system might harm interests of private investors and securities firms, as not every stock is fit for the mechanism. 

According to them, Hong Kong has a plenty of small-cap stocks and stocks of low liquidity, which often experience price dive. If the mechanism was triggered, some small investors and securities firms would be unable to sell or cut their holdings. 

But some analysts argued it is conducive to improving Hong Kong's stock market by putting in place a suitable circuit breaker mechanism in advance. 

In fact, as early as 2016, HKEx launched two measures to reform the market structure: Volatility Control Mechanism (VCM) designed to temper stock movements by temporary halting trade when prices fluctuate beyond a pre-determined range, and Closing Auction Session aimed at facilitating trade execution at securities' closing prices. 

However, VCM is only applicable to 81 key HSI & HSCEI constituent stocks and 8 related index futures contracts. It is noticeable that VCM hasn't ever been triggered since its inception in July 2016.  

Email: lansuying@nbd.com.cn