An industry body says it aims to work with Hong Kong’s securities regulator to raise understanding of the need for the incumbent exchange to take the lead in imposing risk controls against aberrant electronic orders.
It comes after the Securities and Futures Commission rejected a controversial proposal by brokers that Hong Kong Exchanges and Clearing (HKEx) share responsibility for setting risk controls to guard against aberrant orders from e-connectivity through direct market access.
Following its two-month consultation on e-trading regulation, which closed last September, the Securities and Futures Commission (SFC) concluded that pre-trade controls implemented by HKEx should now be matched at a broker level.
Several brokers expressed concerns that the SFC was effectively imposing legal responsibility for reducing e-trading risks – specifically those caused by high-frequency trading – on the brokerage community. They argue it should be enshrined in legislation for the HKEx, too.
Now Philip York, director of eTrading Association, tells AsianInvestor its members want to impart an industry-wide understanding that risk control encompassing pre-order, pre- and post-trade risks is best implemented at the exchange level.
“The implementation of such combined risk controls at the exchange level is more important than at the broker level, yet this point was never raised in the consultation paper,” says York.
“If intermediaries are primarily responsible for implementing risk controls, the differences between [their] implementation will create latency differentials that will ensure the playing field will never be level.”
He says the association plans to hold discussions with the SFC to stress why this is important for both buy- and sell-side participants.
At an industry forum last August, brokers had argued that exchanges should assume the role of ensuring a safe and orderly market because being market-neutral, they are best-placed to ensure a level playing field and orderly conditions for everyone.
They claimed that if the exchange was not charged with such responsibility, then brokers might be incentivised to tweak their systems and compromise their risk safeguards for commercial reasons, which in turn would create more risks for the market as a whole.
But in its report conclusion, the SFC chose not to heed such views, saying “although such controls are implemented at the market level [by the exchange], intermediaries must also implement specific controls to manage risks arising from electronic trading at the broker/firm level”.
The SFC is referring to existing pre-trade controls at the HKEx cash and derivatives markets to guard against irregular orders, and measures to handle erroneous trades.
The regulator added that it does not intend to mandate specific parameters for these pre-trade controls, as these and risk management measures may vary from broker to broker depending on the firm’s business model and risk tolerance.
It also said that brokers are not expected to ensure or guarantee that no erroneous orders are sent to the market, although these pre-trade controls should still be “reasonably designed” to be able to prevent such erroneous orders.
Such “reasonable designs” for automated pre-trade controls include monitoring against orders exceeding prescribed trading and credit thresholds set on clients; alerts to DMA users to an entry of potential erroneous orders; and the ability to prevent the entry of such orders.
The SFC received a total of 34 written submissions during its consultation process. The new requirements on DMA, now incorporated into the Code of Conduct for “persons licensed by or registered with the SFC”, are due to become effective from January 1 next year.