Today, the Shanghai Stock Exchange (SSE) officially promulgated the “SSE Detailed Rules for Real-time Monitoring on Abnormal Trading of Stocks on SSE Star Market (Soft Implementation)” (the “Detailed Rules” for short). Regarding the formulation of the "Detailed Rules", an SSE official answered the relevant questions.
Q1: Can you brief us on the main considerations in the formulation of the "Detailed Rules"?
A: The major institutional innovation of launching the SSE Star Market and piloting the registration-based IPO system is an important initiative to improve the multi-level capital market system in China. In order to maintain the stock trading order on the SSE Star Market, protect legitimate rights and interests of investors and prevent trading risks, the SSE formulated the “Detailed Rules” based on the "Trading Rules of Shanghai Stock Exchange", the "Special Provisions of Shanghai Stock Exchange on Trading of Stocks on the SSE Star Market" (the "Special Trading Provisions" for short) and other rules. In the process of formulation, the following three issues were mainly taken into consideration.
First of all, it is necessary to implement the overall requirements for optimizing regulation of trading, which shall be highlighted in the whole process of the SSE’s market surveillance. In order to make the regulation more standardized and transparent and stabilize the regulation expectations in the market, the SSE has disclosed the qualitative and quantitative standards for the monitoring on abnormal trading behaviors to the market for the first time in the form of business rules, so as to convey the regulatory requirements for compliance transactions, urge the members to fulfill the responsibility for joint regulation, ensure the fair trade opportunities for the investors, and maintain the normal trading order of the SSE Star Market.
Secondly, it is necessary to refine and innovate in the specific provisions of the trading mechanism. As the companies listed on the SSE Star Market are characterized by new business models and great uncertainty, in order to prevent significant market fluctuations and guarantee the market liquidity, it is necessary to innovate in the trading mechanism for the SSE Star Market. Drawing on the experience on the main board and mature overseas markets, the SSE has established the trading mechanisms for the ranges of valid order prices, temporary trading suspension during trading hours, etc. on the basis of sufficient demonstrations. The “Detailed Rules” refines the provisions of the above-mentioned trading mechanisms.
Thirdly, it is necessary to clearly define the regulatory arrangements that are in line with the characteristics of the market. Based on the characteristics of the companies and the types of investors on the SSE Star Market, the mature regulation experience on the main board and the principles of prudent trading and decentralized trading, the SSE formulated the monitoring standards for abnormal trading behaviors on the SSE Star Market, and specified the countermeasures to be taken in the event of abnormal fluctuations and serious abnormal fluctuations of the stocks. At the same time, in order to avoid the impact of large-amount orders on the secondary market trading, the monitoring circumstance of order placing rate’s irregularities for the stocks with serious abnormal fluctuations is newly added.
Q2: Can you brief us on the main contents of the "Detailed Rules"?
A: According to the overall guideline of “disclosing standards and taking comprehensive measures”, the “Detailed Rules” provides for comprehensive measures in the improvement of the trading mechanism, disclosure of trading information, collaboration of members in regulation, regulation on abnormal fluctuations and unusual transactions and other aspects, so as to prevent significant fluctuations in the market.
The “Detailed Rules” includes a total of 42 articles in 6 chapters, and the main contents are as follows:
First of all, the specific requirements for the improvement of the trading mechanism are stipulated. On the basis of the "Special Trading Provisions", the "Detailed Rules" provides for the calculation standards and applicable conditions of the ranges of valid order prices, as well as the triggering conditions and suspension time for the temporary suspension of trading during the trading hours, and requires that the market orders shall include the protective price limits that investors can accept.
Secondly, the criteria for determining serious abnormal fluctuations are detailed. On the basis of the criteria for determining and measures for dealing with the abnormal fluctuations in the “Special Trading Provisions”, the “Detailed Rules” further stipulates the criteria for identifying the serious abnormal fluctuations of stocks and the specific measures that can be taken.
Thirdly, the standards for monitoring abnormal trading behaviors are disclosed. By summarizing, analyzing and generalizing the existing regulatory experience, the SSE has disclosed to the market the standards for monitoring 11 typical abnormal trading behaviors in the 5 major categories of placing false orders, pushing up or dragging down stock prices, maintaining upper or lower price limits, conducting self-trade (transactions with oneself as mutual counterparties) and making order placing rate’s irregularities of stocks with serious abnormal fluctuations, and the above-mentioned types of behaviors have been described qualitatively and quantitatively.
Fourthly, the responsibility for regulating the abnormal trading behaviors is tightened. The "Detailed Rules" stipulates that if an investor conducts abnormal trading behaviors, the SSE will take regulatory measures or disciplinary action in accordance with the "Measures of Shanghai Stock Exchange for Implementation of Disciplinary Action and Regulatory Measures". Strict regulation will be imposed on the investors who repeatedly and continuously conduct abnormal transactions, and are suspected of participating in excessive speculation and market manipulation. The SSE will take regulatory measures or disciplinary action against the members who fail to properly perform their duties in managing the clients’ trading behaviors.
Q3: What are the considerations of the SSE in disclosing to the market the standards for monitoring the abnormal behaviors of trading stocks on the SSE Star Market?
A: Disclosing the standards for monitoring the abnormal transactions of stocks was an important innovative measure taken by the SSE for regulating the trading on the SSE Star Market, which was also unprecedented in the mature markets at home and abroad. The SSE advanced the disclosure of the standards mainly based on the following four considerations.
The first consideration is to improve the standardization of trading regulation. The SSE has always attached great importance to and actively promoted the standardization of trading regulation. Since 2016, the SSE has guided the market in stabilizing the regulatory expectations by releasing typical cases of abnormal trading and organizing compliance trainings for the members and other means. The release of the standards for monitoring the abnormal stock trading behaviors on the SSE Star Market in the form of business rules is an important measure to further improve the transparency of regulation and implement the overall requirements for optimizing the trading regulation.
The second consideration is to give play to the role of the SSE Star Market as an experimental field for reform. The disclosure of the monitoring standards for abnormal trading behaviors on the SSE Star Market is not only an important innovation in the regulatory system aimed at maintaining the trading order of the SSE Star Market, but also a full reflection of the function of the board as an experimental field for reform, which helps to accumulate useful experiences that can be promoted and replicated for the trading regulation on the main board and other markets, and then boost the healthy development of the entire capital market.
The third consideration is to implement the responsibility of the members for collaborative regulation. The disclosure of the monitoring standards to the market provides a basis for the members to manage the clients’ abnormal trading behaviors and carry out the investor education, offers the rules for reference to the members in developing the monitoring system, gives further play to role of the members in timely detecting and promptly stopping the abnormal trading behaviors, and advances the improvement of the trading regulation model “centering around the regulatory members”.
The fourth consideration is to build a standardized and orderly market environment. The disclosure of the monitoring standards to the market will further improve the regulatory system for abnormal trading behaviors, and help investors to carry out self-discipline and conduct trading based on laws and compliance. At the same time, the move will prevent the abnormal trading behaviors from misleading the investors in making trading decisions, reduce the interference of abnormal trading behaviors on the trading order, create a standardized and orderly market trading environment, and safeguard the legitimate rights and interests of investors.
Q4: What are the considerations of the SSE for the trading mechanism arrangements such as the range of valid order prices, temporary trading suspension during trading hours and protective price limits for market order?
A: In view of the characteristics of the companies on the SSE Star Market, the “Detailed Rules” specifies the trading mechanisms such as the range of valid order prices, the mechanism for temporary trading suspension during trading hours and the protective price limits for market order, which reflects the innovation in designing the trading mechanisms, with the aim of establishing a more market-oriented stock market with strengthened the price discovery function and guiding the rational investment concept in the market.
First of all, the range of valid order prices is set. At present, the markets in Hong Kong and Japan and the exchanges such as Chicago Mercantile Exchange and Eurex Exchange have adopted the mechanism for range of order prices, the main purpose of which is to prevent the occurrence of abnormal trading behaviors such as wrong orders and maliciously pushing up or dragging down stock prices. In determining the specific parameters for the range of order prices, the SSE conducted calculations and demonstrations repeatedly, and fully considered the impact on market liquidity. As a result, the limits will only be imposed on the high-priced buy orders and low-priced sell orders that significantly deviate from the market prices, so as to ease price fluctuations.
Secondly, the mechanism of temporary trading suspension during trading hours is adopted. In the process of designing the trading mechanism, on the one hand, the adoption of trading suspension during trading hours, a cooling measure, can provide a certain cooling-off period for market participants in the case of sharp fluctuations in stock prices, so as to mitigate the overheated speculative atmosphere to some extent; appropriately raising the trading suspension threshold and shortening the time of a single trading suspension can minimize the impact on the continuity of market trading, and provide market participants with more trading time for full game, which will help to form reasonable prices rapidly.
Thirdly, the protective price limits for market order will be implemented. In order to effectively protect legitimate rights and interests of investors, the SSE optimizes the processing modes of market orders on the SSE Star Market. Investors should set the highest price of buy orders and the lowest price of sell orders that can be accepted (that is, the protective price limits), which will prevent the market orders from being filled at the prices beyond the investor's expectations and reduce the trading risks for the investors in case of rapid fluctuations of market prices.
Q5: What are the considerations of the SSE for identifying the circumstances of abnormal and serious abnormal fluctuations in stock trading on the SSE Star Market?
A: In order to curb the irrational fluctuations in the market, the trading regulation for the SSE Star Market distinguishes the circumstances of abnormal and serious abnormal fluctuations of stock trading. Judging from the actual experience in regulation, in addition to the sudden rise and fall of the stock prices in a short period of time, the long-term deviation of the stock prices is also the focus of regulation. Therefore, it is necessary to further subdivide the circumstances of abnormal fluctuations. To this end, on the SSE Star Market, the abnormal fluctuations in the same direction occurring repeatedly in 10 consecutive trading days, the significant deviations of accumulative increases or drops in the closing prices during 10 or 30 consecutive trading days, and other circumstances will be indentified as those of serious abnormal fluctuations. Different countermeasures have been set up for the circumstances of abnormal and severe abnormal fluctuations. In terms of the disclosure of the trading information about the circumstances of abnormal fluctuations, the SSE will announce the names and buying or selling amounts of 5 sales offices of securities companies with the largest accumulative buying or selling amounts during the period of abnormal fluctuations; regarding the circumstances of serious abnormal fluctuations, the SSE will announce the classified statistical information of the investors during the period of severe abnormal fluctuations, so as to enable the investors to grasp the changes in the trading structure more accurately. In addition, a series of countermeasures have been set up for the circumstances of severe abnormal fluctuations, and the order placing rate’s irregularity for the stocks with serious abnormal fluctuations has been added as a type of abnormal trading behavior.
Regarding the benchmark indicators for identifying abnormal and severe abnormal fluctuations in stock trading, as in the early stage of opening, the SSE Star Market indexes have not been prepared and released, and the main board and the SSE Star Market are two boards operating independently, resulting in incomparable market trends between the two, the adoption of the Shanghai Composite Index as the benchmark is likely to cause misunderstanding and misjudgment. Therefore, in order to ensure the continuity of abnormal trading regulation, with careful considerations, it is planned to adopt the arithmetic average of the increases and drops of the closing prices on the day of all stocks listed on the SSE Star Market (excluding the stocks without price increases or drops and the stocks with trading suspension in the whole day) as the benchmark index increase or drop, in which way to calculate the deviations of increases or drops of closing prices. The SSE Star Market index will be adopted as the benchmark index after being released.