Move part of SFC's ongoing efforts to curb risks from high-frequency trading

Hong Kong's securities regulator and stock market operator are mulling a marketwide circuit breaker in a bold move to bring Asia's financial center in line with its global counterparts and combat extreme moves in a volatile market.

In its annual report for fiscal year 2018-2019 issued on Wednesday, the Hong Kong Securities and Futures Commission signaled its intention to introduce a circuit breaker mechanism that suspends trading in the benchmark Hang Seng Index run by Hong Kong Exchanges and Clearing Ltd (HKEx), the operator of Asia's third-largest stock exchange.

"A public consultation will be conducted by HKEx in due course," the report said.

The idea of a circuit breaker differs from the stock-specific approach currently used by the exchange operator as a cooling-off device for an overheating market.

"A index-wide circuit breaker mechanism should be an effective tool to guard against sharp fluctuations and cool down the market. From this point, Hong Kong could take a leaf from its global peers' books," said Dickie Wong, research director at Kingston Securities in Hong Kong.

In 2016, HKEx launched a "volatility control mechanism" (VCM) that imposes a price limit for trading in major constituent stocks and certain futures contracts for short periods during times of extreme price movements.

The mechanism halts trading in the 81 largest constituent stocks listed on the Hang Seng Index and the Hang Seng China Enterprise Index, also called the H-share index, once the price surges or slumps by 10 percent within five minutes. Only one suspension is allowed in each of the morning or afternoon trading sessions.

Since its rollout, there have been no trigger events in the securities and derivatives markets.

The SFC said a review of the VCM is needed "in light of evolving international standards and best practices".

In March 2018, the International Organization of Securities Commissions urged stock exchanges the world over to be equipped with mechanisms to keep extreme volatility under control.

Algorithm-powered computer trading programs can overwhelm financial exchanges, causing sharp spikes or falls in the market. The May 6, 2010, flash crash in New York wiped out $1 trillion in value in about half an hour of trading.

Even though stock exchanges have introduced circuit breakers and other measures, they have to be reviewed and fine-tuned on a regular basis to reflect the latest market developments, according to IOSCO.

The proposed circuit breaker system would bring Hong Kong in line with other major markets worldwide, which all have various mechanisms in place to address the risks posed by high-frequency trading in financial markets.

In the United States, the New York Stock Exchange will suspend trading for 15 minutes if the benchmark S&P 500 index falls by 7 percent and 13 percent from the previous day's close at or before 3:25 pm local time.

If the crash in the market hits 20 percent at any time during the session in what is called a Level 3 event, trading that day will be halted. There are also thresholds for individual stocks that are dependent on its price.

The London Stock Exchange imposes a five-minute halt on stocks trading erratically, while the circuit breaker in Chinese markets launched in 2016 was scrapped after causing a wave of selling.

The Hang Seng Index advanced by 1.23 percent, or 348.29 points, to finish at 28,550.43 points on Thursday.