Singapore Exchange Regulation (SGX RegCo) is seeking feedback on possible changes to the auction mechanism in the securities market, to consider their feasibility for implementation.
The proposed enhancements are to prevent extreme price dislocations while enabling price discovery, thereby strengthening the robustness of, and investor confidence in, the auction routines. They complement existing exchange- and member-level safeguards against such price dislocations. The possible enhancements being contemplated are:
- Implementation of price collars:
Price collars prevent matching of orders beyond a certain range. Orders which could match at prices beyond the price collar do not participate in the relevant auction routine. It is contemplated that a larger price collar of 30% will apply for the opening auction as compared to a 10% price collar for the mid-day and closing auction routines. The reference prices for the collars will generally be the last traded price, which 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. The price collars will act as hard price limits on the matched auction price.
- Extension of auction routine:
An alternative being considered is for an extension of the auction routine by a fixed period should the indicative opening price move beyond a certain threshold. The contemplated thresholds are 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. The extension is proposed to be for 5 minutes to allow market participants to analyse market conditions and review their orders. Participants can enter, modify or withdraw orders during the extended time, but no order-matching occurs until at the end of the time extension. While more time will be given to market participants to manage their orders, there will be no hard price limits on the matched auction price.
- Hybrid model:
SGX RegCo is also considering a hybrid model, where time extensions will apply for the opening and mid-day routines while a price collar will be applied on the closing routine. The operation of both mechanisms will be similar to the proposals above. The hybrid model is intended to promote market-led price discovery in an orderly manner during the opening and midday auctions, while ensuring greater price stability and a fixed end time in the closing auction.
SGX RegCo is seeking feedback on whether these enhancements should be implemented, as well as their appropriate form if so. Other details such the scope of instruments to be covered and treatment of linked instruments are also open to feedback.
Various safeguards already exist in the securities market, including the exchange’s ”force key” function[1] and dynamic circuit-breakers[2]. These safeguards complement market participants’ primary responsibility to ensure adequate internal controls and processes are in place.
“SGX RegCo considered the various interests when proposing these auction mechanism changes. We assessed each proposed mechanism and its potential impact on price discovery, stability of the market as well as on the downstream systems and processes of market participants. We recognise that additional safeguards can serve to complement market participants’ own internal controls, and would like to seek the markets’ feedback on the proposed enhancements,” said Tan Boon Gin, CEO of SGX RegCo.
The consultation found here is open for feedback till 15 August 2019.
[1] “Force key” function is where a market participant entering orders at prices beyond a prescribed range must further confirm the order by using such function, before the order can be submitted. This is an exchange-level pre-trade check that operates throughout the trading day, intended to minimise the occurrence of error trades arising from the erroneous entry of order prices.
[2] Dynamic circuit-breakers operate during the continuous trading sessions, acting as speed bumps which moderate price movements during trading.
