HKEx’s CEO Charles Li has conjectured that circuit breakers may be needed in Hong Kong’s stock markets in order to defend against machine and human errors. In the past, circuit breakers have been deemed unnecessary in Hong Kong and have not been put in place. However, Li feels that evolving market conditions require the debate to be re-opened.
He explained that computers have changed the speed and method in which trading is conducted in Hong Kong. He considers that automation via algorithms may generate erroneous orders which could create an overreaction and threaten market integrity. He went on to say that whilst this reaction would eventually correct itself, it might not be before turmoil that could impact confidence in the market.
“Some market participants have told us that they are concerned about the adequacy of the measures to safeguard the Hong Kong market against disorderliness caused by human and machine error,” he wrote in his blog. “Indeed, this area is one that the International Organisation of Securities Commissions has asked markets to review, and the Security and Futures Commission’s new electronic trading regulations which became effective early this year push in the same direction. I think it is timely for a renewed debate on circuit breakers to determine if they are now needed in the Hong Kong market.”
He said that the motive for this is not to align Hong Kong with rules existing in mainland exchanges, nor to apply strict price limits or trading suspensions.
In his opinion, circuit breakers in Hong Kong would have to mitigate the risk of extreme and abrupt market volatility caused by non-fundamental factors, such as faulty algorithms, but allow fundamentals-driven price movement. He does not envisage any decisions being made until the exchange has consulted the market.