Hong Kong: Circuit breakers in June

Tuesday, January 12, 2016 // Written by Enzio von Pfeil

We all know what havoc China's recent circuit breakers wreaked.  Expect the same for  Hong Kong this June. Investment implication.

  1. Effective June 2016

    Last year, the government announced that circuit breakers would be introduced here this June. This measure is designed to avert flash crashes as increasing numbers of high frequency traders join the market.
  2. Different to China

    According to the South China Morning Post's Enoch Yiu (11th January 2016), ours will be "...designed differently from the ill-fated circuit breaker on the mainland."  He proffers three reasons why ours will be better:
  3. Stock-specific

     "The Hong Kong system will only suspend certain stocks and not the whole market. The rule would apply to the 81 constituent stocks of the Hang Seng Index and the H-share index but not to all 1,800 stocks traded in Hong Kong.  The mainland circuit breaker affected all the 2,700 - plus stocks in Shanghai and Shenzhen, rather than those of individual companies."
  4. Higher threshold

    "Second, the threshold for triggering the circuit breaker will be higher in Hong Kong, with a five minute cooling-off period of a share price moves 10 per cent up or down within five minutes."
  5. Short trading suspension

    "Third, the Hong Kong system will only take two breaks, one each for the two sessions for the day, whereas on the mainland, trading could be suspended for the whole trading day."
  6. Inherent destabilizer

    Being a Hayekian,  I oppose circuit breakers for Hong Kong: like in China, they must exacerbate market volatility - precisely because of more and more high frequency traders playing their stealthy games with our market. (Required reading: Flash Boys by Michael Lewis.) We prefer the old adage of "if it ain't broke, don't fix it."
  7. Investment implication

    Expect greater volatility the day that our circuit breakers are introduced.  Avoid the market until China has decided how much she wants to support her economy OR her currency, i.e. until China's Economic Time® improves. Remember always that Hong Kong is the water skier at the back of the Chinese speed boat...


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