Volatility Control Mechanism (VCM)

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What are the design principles behind the VCM model for Hong Kong?

HKEX’s proposed VCM is specifically designed to safeguard market integrity from extreme price volatility arising from automated trading (“Flash Crash”, bad algorithms, etc.). It also serves to alert the market with a temporary cooling-off period for the participants to reassess their strategies and positions and make investment decisions. It is not a trading halt, does not intend to limit the ups and downs of prices due to fundamental events, and it also does not work the same way as the daily price limit model which sets a specific daily price range for derivatives trading as seen in some markets.

Special care has been taken in VCM design to minimise market interruption. For example, it applies to individual instrument rather than the entire market, it is based on a dynamic rather than a static reference price, the triggering level of ±5% is set up such that it would not be triggered too often, VCM is not applicable in certain periods (the first 15 minutes of the morning and afternoon trading session and the last 20 minutes of the afternoon trading session) and to certain instruments.

How does the VCM model work?

HKEX has adopted a dynamic price limit VCM model, which would trigger a cooling-off period in case of abrupt price volatility is detected at the instrument level.

The following diagram illustrates the case of a VCM trigger on an applicable instrument.

VCM is applicable for the normal trading session excluding the Pre-Market Opening Period and After-Hours Trading session.
During the normal trading session, the potential trade price of a VCM Exchange Contract will be continuously checked against a dynamic price limit of ±5% based upon the reference price which is the last traded price 5 minutes ago.
VCM is triggered if a futures contract is ±5% away from the last traded price 5-min ago; A 5-min cooling-off period will start.
During the cooling-off period, trading is allowed within a pre-defined price band.
Normal trading with VCM monitoring will resume after cooling-off period.

What instruments are covered under the VCM?

VCM covers spot month and next calendar month contracts of the Hang Seng Index (HSI), Mini-Hang Seng Index (MHI), H-shares Index (HHI), Mini H-shares Index (MCH) and Hang Seng TECH Index (HTI) futures markets.

What is the applicable period for VCM monitoring?

VCM monitoring is applicable to continuous trading session (CTS), excluding:

the first 15 minutes of the morning and afternoon trading session
the last 20 minutes[1] of the afternoon trading session

*[1] Since a cooling-off period will last for 5 minutes, the monitoring will stop 20 minutes before end of the Afternoon Session

Why would trading of the related or linked instruments of a particular futures contract be allowed to continue if the futures contract has had a VCM trigger and is in a “cooling-off” period? What is the rationale behind that?

As the futures contract is still allowed to trade within a band during the cooling-off period, its linked or related instruments should be allowed to trade as well. Consideration was given to whether the linked or related instruments should also trade within a band, but defining a band is not practical since the linked or related instruments are typically leveraged or may have inherently different product characteristics. Halting trading of these linked or related instruments would not be preferred too as it may have a significant impact and amount to excessive market intervention.

Can VCM be triggered on an applicable instrument multiple times in a trading day?

VCM can be triggered multiple times in a trading day.

When VCM is triggered, will there be relevant message broadcasted in the trading system?

There will be 2 messages broadcast in HKATS when VCM is triggered:

BI41 – a status change message indicating the beginning and the end of a cooling-off period

BI81 – a Market Message with information on the start time, the end time, the reference price and price limits of the cooling-off period

When I receive Market State “OPEN_DPL_VCM” or “OPEN_VCM” for a market, does it mean that all the series under this market are eligible for the VCM?

Only 10 contracts, namely HSI Futures (HSI), Mini-HSI Futures (MHI), H-shares Index Futures (HHI), Mini H-shares Index Futures (MCH) and Hang Seng TECH Index Futures (HTI) spot month and the next calendar month contracts are covered in the VCM. Therefore if the Market State “OPEN_DPL_VCM” or “OPEN_VCM” is received for a market, an instrument type or a class, it does not necessarily mean that all series within that market/instrument type/class are eligible for VCM.

In which message I can find the VCM related information (e.g. cooling off start and end time, upper and lower price limit and reference price)?

The information of a VCM cooling off period is provided in two Market Alert (323) messages in a structured manner so as to facilitate retrieval of the information including the start time, end time, reference price, upper and lower price limits. For details, please refer to OMD-D Developers Guide.