SGX mulls tweaks to auction routines after Jardine's Jan plunge
SINGAPORE (July 15): The Singapore Exchange Regulation (SGX RegCo) is considering several measures to enhance the auction routines of the local stock market.
This comes in response to the sharp drop in the share price of conglomerate Jardine Matheson Holdings, which occurred during the 30-minute-long pre-open trading session in January.
On one hand, SGX RegCo is mulling over an implementation of a price collar. This mechanism aims to act as hard price limits on the matched auction price, thus preventing the matching of orders beyond a certain range.
SGX RegCo is considering setting the threshold at 30% for the opening auction.
This is to account for market participants to digest news and information overnight, says Chew Chin Yee, head of regulatory development & policy at SGX RegCo.
The mid-day and closing auction routines, however, will have a lower threshold of 10% as any material news would have been priced in during the continuous trading sessions, explains Chew.
The reference prices for the price collars will generally be the last traded price.
This could be the previous day’s closing price for the opening auction or the last traded price before the mid-day break and closing auction, respectively.
On the other hand, SGX RegCo is contemplating an extension to the auction routine by five minutes. This is to allow market participants to analyse market conditions and review their orders.
The extension will be triggered when the indicative opening moves hit 30% from the previous day’s closing price of a stock for the opening routine, and 10% from the last traded price for the mid-day and closing routines.
There will be no hard price limits on the matched auction price during the extension.
Alternatively, SGX RegCo is considering a hybrid model. In this scenario, the time extensions will apply for the opening and mid-day routines, while a price collar will be applied on the closing routine.
The proposed enhancement is open for feedback until August 15.
According to SGX RegCo Tan Boon Gin, the proposal to enhance the auction routines of the local stock market is to complement the existing remedy of price dislocation.
Currently, existing rules allow for trades to be cancelled, only if the requests to do so were made within 30 minutes of the transaction.
In the case of Jardine Matheson, however, the requests to cancel trades were made after the stipulated time. Hence, the trades could not be terminated, says Tan.
This caused the 187-year-old company to briefly lose US$41 billion ($55.6 billion) in market value before recouping losses to end the trading day up 0.5%.
Market observers and traders had speculated the trading mishap was due to fat finger error.
Jardine Matheson, in January, said it believed the sharp decline was caused by an “electronic trading error”.
Interestingly, SGX subsequently said in a statement that there were no fat finger error or “any malfunctioning systems on the part of participants”.
“So I think it is fair to say that this [proposed enhancement] was prompted by what happened at Jardine Matheson,” Tan tells reporters on Monday.
“After what [had] happened with Jardine Matheson, what we are trying to do now is to enhance our ex-ante remedies,” he adds.
The proposed enhancement, however, does not negate the existing remedy of price dislocation. Singular request to cancel trades within 30 minutes is still available.
“Should there be still some price dislocations – even after our ex-ante remedies are introduced which we certainly hope wouldn’t be the case – we would still have the option of the ex-post remedy to try to address that,” Tan says.
