TAIFEX studying measures to prevent futures volatility

Taipei--The Taiwan Futures Exchange (TAIFEX), which operates the local futures market, said Friday that it is studying measures to prevent volatility seen a day earlier, when TAIEX futures for August contracts suffered a plunge at one point.

TAIFEX Chairman Liu Len-yu (???) told the press that a "price banding mechanism" is being considered by the exchange in a bid to protect the futures market from the chaos seen the previous day.

The mechanism refers to a platform in which an order placed by an investor that could result in a transaction whose execution price is far away from that of the previous transaction and could cause a plunge or a jump in futures product prices will be rejected, according to the TAIFEX.

Liu said that such an order-rejection mechanism is aimed at protecting the futures market from trading irregularities such as error trades or "fat-finger errors," which refers to dealers who make data entry errors while dealing with large trading data, or irregularities caused by computer trading programs.

He said that the price banding mechanism is expected to be put into place next year at the earliest.

The move to study measures to prevent volatility in futures trading came after the August TAIEX futures, which uses the Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) as the underlying index, fluctuated more than 1,000 points in just one minute after the futures market opened at 8:45 a.m. Thursday.

The wild volatility dampened investor sentiment even in the spot market, where the weighted index closed down 0.47 percent that day, even though the Dow Jones Industrial Average continued to hit a new high the previous day.

Right after the volatile movement, the TAIFEX launched an investigation into the incident. Liu said that as of 9 p.m. Thursday, the exchange had come to a preliminary conclusion that no market manipulation practices were involved in the volatility.

Liu said that the plunge took place soon after the futures market opened as investors' moods were impacted by weaknesses in other equity markets in the region, which prompted investors to place selling orders, which in turn pushed down the August TAIEX futures to 10,042 points from 10,420, and the futures prices fell further to an intraday low of 9,408 before making a quick rebound.

The more-than 1,000-point movement involved more than 2,000 trading accounts, with trading volume of more than 9,000 contracts.

The August TAIEX futures closed Thursday at 10,406 points, off a high of 10,430, down 47 points or 0.45 percent.

Liu said that the probe found that no error orders were placed, despite the volatility in the futures market.

Liu added that the probe also found that the computerized trading system functioned normally that day, with no signs that the trading platform had been hacked.

According to Liu, the incident was an isolated case.

The TAIFEX said that based on preliminary data from clearing members, some investors profited and some lost from the price fluctuation, so that the total loss was about NT$6 million (US$198,675) among 14 accounts due to the incident.

Source: Focus Taiwan News Channel