Volatility control mechanism
Introduced by the Hong Kong Exchanges and Clearing Limited (HKEX) on 22 August 2016, the Volatility Control Mechanism (VCM) provides a temporary cooling-off period when an applicable security or futures contract experiences extreme price volatility. During the cooling-off period, a fixed price limit is set to confine trading within a specified price range.
Trading is not suspended
When the price of an applicable security or futures contract fluctuates extremely due to some trading incident such as algorithm error, the VCM's five-minute cooling-off period offers time for investors to reassess their strategies, and helps to safeguard the market and other products against the chain effect and systematic risks arising from the trading incident. However, the VCM is not a suspension of trading as the applicable security or futures contract can still be traded within a fixed price limit during the cooling-off period.
- Applicable products: The VCM becomes effective to the securities market from 22 August, and covers the Hang Seng Index (HSI) and Hang Seng China Enterprise Index (HSCEI) constituent stocks (81 stocks as of 31 July). Extended to the derivatives market in the 4th quarter of this year, the mechanism covers spot and next calendar month index futures contracts with HSI and HSCEI as their underlying index (currently eight futures contracts).
- Applicable trading session for VCM: The morning and afternoon continuous trading session, excluding the first 15 minutes of the morning and afternoon trading sessions and the last 15 minutes* of the afternoon trading session.
- Trigger level: Taking the last traded price 5 minutes ago as the reference price, if an order price of an applicable security (a futures contract) is deviated from its reference price by more than 10% (5% for futures contracts), the trade will not be accepted, and it will trigger the cooling-off period during which the applicable security can only be traded within ±10% of its reference price (±5% for futures contracts).
- Number of triggers: For an applicable product, maximum of two triggers per day. One trigger in the morning and in the afternoon of continuous trading sessions each. Trading is not subject to control after the cooling-off period in the same trading session.
Learn more about the operation and features in the VCM section of the HKEX website.
Does not restrict daily price movements
The VCM is not used to set the static daily price limit or daily price range for the applicable securities or futures contracts. Besides, the VCM will be triggered only when the potential trading price goes up or down abruptly within five minutes during the monitoring period, but there will be no trigger if price moves gradually in one direction, even if the movement is significant relative to the closing price of last trading day.
In addition, when the cooling-off period is triggered and the applicable security or futures contract has to trade within the fixed price limit, trading of the related products such as warrants and options are not affected and they are not subject to price limit.
*Since a cooling-off period will last for 5 minutes, the monitoring will stop 20 minutes before end of the afternoon session.