SGX looking to curb big price swings during auction windows

It's seeking feedback on price collars, time extensions to prevent price volatility during pre-open, mid-day and closing auctions

Singapore

THE Singapore Exchange (SGX) is seeking feedback on whether it should introduce volatility controls to the securities trading auction process, to protect investors from extreme price swings.

The proposed controls could be introduced as early as next year, depending on the feedback received.

Since 2014, the SGX has used dynamic circuit breakers that act as "speed bumps" to slow down sharp price moves when a trade is entered at a price which is more than 10 per cent away from the last traded price at least five minutes earlier.

However, circuit breakers only work during continuous trading, and there is nothing similar to a circuit breaker during the auction process which happens three times a day at the opening, mid-day and closing of each trading session.

Thus, the SGX is considering introducing price collars and/or providing a time extension for the auction period.

The move comes after Singapore-listed index constituent Jardine Matheson plunged 83 per cent in pre-market trading in January, before recovering to regular levels after the market opened.

That flash crash was not due to fat finger errors or any malfunctioning systems on the part of the participants, the SGX said, but requests by participants to cancel their trades prompted the regulator to think about how it could avoid similar situations in future.

Tan Boon Gin, chief executive of SGX Regco, told reporters on Monday that the traditional remedy after a price dislocation has taken place is to cancel the trade that caused the price-dislocation.

"But this remedy is inherently limited in one respect, which is time. Once too much time has passed, we cannot cancel the trade, otherwise it will cause too much uncertainty in the market. Hence our trade cancellation policy clearly prescribes that any request to cancel a trade has to come in within 30 minutes of the trade. Once that 30 minutes is past, market participants are entitled to assume that the trades are good, and transact accordingly," he said.

"In the case of Jardine Matheson, there were requests to cancel the trades, but the requests came in only after the 30 minute window, and it was not possible to cancel," Mr Tan added: "We need to consider... safeguards that will kick in before the price dislocations happen, and hence the options that you see here today."

One option is a price collar that prevents orders from being matched beyond a certain price change.

The SGX is suggesting that a 30 per cent price collar be applied for the pre-opening auction, with a 10 per cent price collar for the mid-day and closing auction routines. The reference price for the collars would be the last traded price, which could be the previous day's closing price for the morning auction, or the last traded price before the mid-day break and closing auction respectively.

The wider 30 per cent price collar for the pre-open takes into account the fact that more news may have come in overnight since trading closed, so a wider band is needed to allow price discovery. The tighter 10 per cent collar for the middle and the end of the trading day is consistent with the 10 per cent threshold on the circuit breakers.

The second option is to extend the auction routine by four to five minutes if the indicative opening price during the auction moves beyond a certain threshold. The time extension gives the market more time to react, by increasing liquidity to move the price closer to fair value.

The SGX is suggesting a time extension if the indicative opening price moves beyond 30 per cent of the previous day's closing price for the pre-open. For the mid-day and closing routines, the SGX is looking at a 10 per cent threshold from the last traded prices.

A notification will be blasted to brokers if a time extension is triggered, and a status indicator will appear next to the ticker, similar to what is seen when circuit breakers have been triggered.

The third option being considered by the SGX is a hybrid model, where time extensions will be applied for opening and mid-day auction routines, and a 10 per cent price collar introduced for the closing routine.

Price collars are used by exchanges in the US, Japan and Hong Kong. Time extensions are used by some European exchanges, the SGX said.

The volatility controls will apply only to stocks, exchange-traded funds and other securities for which circuit breakers have been imposed, namely liquid securities that account for around 80 per cent of trading activity in the Singapore market.

Over the past three years, if a 30 per cent price limit had been in place at the pre-open, the auction matched price would have reached or exceeded this limit an average of seven times a year, the SGX said.

The consultation is open for feedback till August 15, and changes will be implemented if the controls are deemed feasible. SGX head of regulatory development and policy Chew Chin Yee said: "What we are proposing will involve quite an extensive amount of system changes both for us and for our participants, so... we need to see, industry-wide, how long they will need to make the system changes if they are necessary."

Raj Mathur, co-head of Credit Suisse's advanced execution services in the Asia Pacific, said: "Given the growing importance and overall liquidity contribution that occurs during the auction phases... (the proposed changes are) a positive step to ensure fair and orderly markets, by centralising control and establishing explicit limits with standard rules of operation, which ensures equality of protection for all participants."

He added: "The increased price protection offered by the SGX's controls should offset much of the concern around the residual impact cost of adopting the changes by its member participants."

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