CIO, CLSA slam HKEx circuit-breaker plan

Hong Kong's exchange has proposed circuit breakers for curbing extreme share-price moves, but the CIO at a big fund firm and CLSA's head of trading have criticised the idea.
CIO, CLSA slam HKEx circuit-breaker plan

Share price circuit-breakers proposed by Hong Kong’s bourse will damage the city’s free-market credentials if they are approved, market players have warned.

Hong Kong Exchanges and Clearing (HKEx) is considering introducing a mechanism whereby a five-minute ‘cooling-off period’ is triggered if a stock price moves more than 10%. Futures contracts would be limited to a 5% swing before the cooling-off period was triggered.

But the chief investment officer at a large long-only fund house has slammed the idea, saying this type of circuit-breaker would be inappropriate for the Hong Kong market, which is dominated by institutions. The reasoning here is that such professional investors do not need the same level of protection as retail players.

If there were changes in fundamentals, he said, the market should allow sellers and buyers to determine the fair price. If the exchange imposed daily limits on share price moves, then it would just take longer to reach that point, the CIO noted.

Stocks should be allowed to appreciate or depreciate based on their fundamentals and the wider equity environment, agreed Andy Maynard, global head of trading and execution at brokerage CLSA. Limitations on price moves would reduce investors’ freedom of choice, he added.

Instead, the unnamed CIO suggested that HKEx should publish more disclosures by listed companies to clarify possible reasons for extreme price movements, which could be released during the one-hour lunch break.

He cited a share suspension last week as an example of where more disclosure was needed. When Hutchison Whampoa, a conglomerate owned by tycoon Li Ka-Shing, was briefly suspended from trading last Friday after it said it was in talks to acquire British telecoms group O2, its sister company Cheung Kong Holdings, also owned by Li, was not.

But the CIO suggested Cheung Kong should also have been suspended from trading, given it is Hutchison’s  sister company. “The stock exchange’s job is to make sure trading is smooth,” he said. “From an investor’s point of view, I would like to see more disclosure from companies.”

Market players have cited the case of Sun Hung Kai Properties as an example of how a stock trading suspension could hit investors’ interests. The Hong Kong property conglomerate last month saw its former co-chairman Thomas Kwok sentenced to prison for bribery.

Upon hearing Kwok’s fate, an investor might have sought to exit the stock immediately, but would have been blocked from doing so if there was a circuit-breaker in place, investors have noted.

Meanwhile, Maynard is in favour of the HKEx reintroducing an old mechanism for closing a trading session. The bourse is consulting on the revival of a system scrapped some six years ago as it failed to tame price swings.

The previous system determined closing prices by pooling share orders and finding an equilibrium where most buy and sell trades could be matched. Late suspicious trading of HSBC shares that saw the price tumble by 24% on March 9, 2009 led to fears that the mechanism was being abused by market manipulators.

HKEx then reverted to its old system where the closing price is determined by the median of the last five trades.

Maynard welcomed proposals to revive the mechanism with enhancements, such as a 5% trading band with reference to the end-of-afternoon trading price and a random closing time.

He reasoned that the previous closing auction mechanism had failed to tame closing price swings not because it was flawed, but as it coincided with a rebalancing by index provider MSCI, which in effect led to increased trading activity and price movement.

Extreme closing-price movements occurred in any market, regardless of the method used, noted Maynard. “As long as it isn’t implemented like last time, I am all for it.”

HKEx is asking for responses to its consultation paper, which can be downloaded here. The consultation closes on April 10.

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