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Hong Kong stock exchange moves to embrace volatility curbs to protect against 'fat finger' mistakes, big share price swings

Enoch Yiuenoch.yiu@scmp.com

History has shown some swings of stocks or whole markets can create panic and heavy losses, suggesting why the operator of Hong Kong's stock market is looking at wider use of volatility curbs.

On October 19, 1987, Hong Kong's benchmark Hang Seng Index dropped 33.33 per cent on a single day. It became known as "Black Monday." It not only was the Hang Seng's biggest fall ever, but the turmoil spread globally, with the US Dow Jones Industrial Average plummeting 22.6 per cent.

Blue chips also haven't escaped big price swings.

Take HSBC, for example, the largest lender in Hong Kong and Europe and the largest of the three-note-issuing banks in the city. Its stock in one of the most widely held on the benchmark, and people like to buy it as a gift for newlyweds and newborn babies.

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But on March 9, 2009, it fell 10.8 per cent during the 10-minute closing auction period. Adding in the loss of the shares during the normal trading hours that day, HSBC lost a total of 24.14 per cent and shed HK$127 billion in market value. It was its worst decline in 20 years.

HSBC's decline caused concern in the investment community and raised questions about the closing auction system as being open to manipulation.

It turned out that Christian Denk, a former Deutsche Securities Asia trader, put in a sell order for 5.4 million shares without a price in the last seconds of the auction period. Meanwhile, another independent retail investor wanted to sell his shares at HK$33.

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Under the closing auction system's design, HK$33 became the closing price on that day. The Securities and Futures Commission found no manipulation in the case but considered Denk's action had created "undue volatility."

The SFC has wanted to suspend Denk's licence for nine months, but he successfully appealed. As a result, no one was punished.

Trading at the Hong Kong stock exchange was closed, as shown in this photo at the time, after the dramatic fall of the Hang Seng index on October 19, 1987. Photo: SCMP alt=Trading at the Hong Kong stock exchange was closed, as shown in this photo at the time, after the dramatic fall of the Hang Seng index on October 19, 1987. Photo: SCMP

The major casualty was the closing auction system.

Almost immediately after HSBC's sharp fall, the Hong Kong Exchanges and Clearing scrapped the 10-month old system and reverted to the old way of taking the median price of the final five transactions. In July 2016, it came up with a new system for the closing auction " a 5 per cent limit on price changes.

It has worked well.

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Now the HKEX is now proposing to add a 15 per cent price limit during the opening tender session.

It is also looking at doing what the US does " having a circuit breaker that can suspend trading in the entire market during extreme volatility. The stock operator is seeking feedback until September 27.

Currently, Hong Kong has a mechanism on the 82 stocks of the Hang Seng Index and the Hang Seng China Enterprises Index that would suspend them for five minutes to cool off if they surge or slump by 10 per cent within five minutes. Under the proposal, 486 shares would be added. Three triggering levels would be set: 10 per cent for large caps, 15 per cent for mid caps and 20 per cent for small caps.

Other places have seen huge swings.

In mainland China, China Everbright Securities in August 2013 had a trading error in its IT system that led it to buy more than 7 billion yuan worth of shares in one morning, sending 16 heavyweight stocks to their 10 per cent daily upper limit.

As a result, the Shanghai Composite Index jumped by 5.6 per cent before retreating in the afternoon. The broker's then chief executive and president, Xu Haoming resigned after the trading mistake, which cost at least 194 million yuan (US$27.39 million).

In a separate error happened at the time, a trader of the brokerage mistakenly sold 10 million yuan of government bonds at an unreasonably low price in a "fat finger" mistake, making Everbright lose another 120,000 yuan. The China Securities Regulatory Commission banned Everbright's proprietary trading for three months.

US has also fat finger case. Hailiang Education Group Inc., a Nasdaq-listed Hangzhou company that provides syllabuses from kindergarten to high schools, was once the world's most valuable company for eight minutes in August 11, 2017, after a fat-finger trading error caused its stock price to jump 20,000-fold.

Bids for the company's stock were received at US$200,000 in the morning on the Nasdaq market, while 700 shares changed hands at that price before trading was halted for eight minutes. The transaction was later annulled, after which the stock's price dropped to US$10.26, ending the day 4.5 per cent higher at US$10.35.

For eight minutes, the company's market capitalisation was at US$5.14 trillion " six times that of Apple, then the world's most valuable company.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.