PLC Panel of Financial Affairs
September 11, 1997

Item V - Suspension of Stock Trading and
its Consequences


1. A stock exchange is, in essence, an organized marketplace for the trading of securities. To protect the general investing public and to ensure the integrity of such markets, operators of such markets and their regulators have a duty to ensure that the marketplace is fair and orderly and that trading thereon is undertaken on a fully informed basis. Where trading in a particular stock fails to meet such requirements, a standard practice adopted by markets all over the world is to suspend trading in the stock. In Hong Kong, the Exchange and the SFC have statutory responsibilities for the market and coordinates closely on questions of suspensions.

Types of Suspensions

2. Suspensions may take one of the two forms: those initiated by the issuer of the stock and those initiated by the Exchange or the SFC. During the first eight months of this year, there were a total of 327 cases of suspensions of trading, of which 271 were initiated by the companies concerned, including 54 cases where the SEHK or SFC indicated they were prepared to seriously consider directing suspension unless the company voluntarily suspended trading in its shares, and 2 were suspended by the SFC under Rule 9 of the Statutory Listing Rules. The average length of suspension during the year is 4 days.

3. Generally speaking, there are three major reasons for suspension:-

  1. Material corporate activities whereby price-sensitive information cannot be disclosed in a timely fashion;

  2. Fundamental concerns about the company's suitability for continued listing and/or trading; and

  3. Unexplained unusual movements in the price or trading volume of the company's listed securities.

Material Corporate Activities

4.Suspensions may be warranted when listed companies are involved in material corporate activities. The following are some examples of material corporate activities involving price sensitive information:-

  • The company is subject to an offer, the terms of which have been agreed in principle;

  • The company is contemplating a rights issue;

  • The company is arranging a placement; or

  • There are substantial changes in the nature, control or structure of the company, and publication of the full details is necessary for a fair and realistic valuation of the listed securities concerned.

    5.Where the parties can ensure total confidentiality during the negotiations and discussions stages to ensure that such price-sensitive information is not leaked out, there is no need for a suspension. This is, however, difficult to achieve given the number of parties usually involved and the obligation is on the issuer to disclose as much information as is feasible as early as possible to avoid an information disequilibrium from developing in the market in the stock and to avoid opportunities for insider trading. However, such announcements tend to take time to prepare and a temporary suspension of trading in its stock pending the announcement to enable the news to be properly disseminated to the market is usually necessary.

    6.Trading will resume once the announcement has been made. The length of the suspension therefore depends on how long it takes the issuer, or its advisers, to draft the announcement and to clear it with the parties concerned. The Exchange and, where appropriate, the SFC endeavour to vet drafts prepared by, or on behalf of, an issuer within the same day of the receipt of such drafts.

    7.In general terms, such suspensions rarely last longer than a couple of days. However, in some cases, it has taken much longer to prepare and clear the announcements because there are financial, accounting or takeovers difficulties that need to be resolved first. In other cases, the delay has been caused by the issuer, or its adviser, having difficulties in preparing the draft or because the Stock Exchange and/or the SFC is not satisfied that the draft fully or accurately reflects the facts and the issuer is not prepared to amend the draft announcement so that it fully discloses the necessary information.

    8.The number of suspensions under this category are: 36 in June, 33 in July and 62 in August, or about two thirds of the total number of suspensions during the period. On average, the length of such suspensions is less than two working days.

    Fundamental Concerns

    9.Suspensions may also be necessary when fundamental concerns arise regarding the suitability of a listed company to retain its listing and/or for trading in its stock to continue. Examples of such concerns are if the company:-

    • is going into receivership or liquidation;

    • has no operations or business;

    • is experiencing financial or cash flow difficulties; or

    • is involved in material litigations or investigations.

      10.The suspension would only be lifted if such concerns have been satisfactorily addressed. As it takes time to resolve such concerns, it is quite common for these companies to be suspended for a long period of time. To date, 12 companies have been suspended for more than three months because of such fundamental concerns. Most of them are in financial difficulties. The Exchange publishes the status of companies under prolonged suspension on a monthly basis to increase transparency.

      Unexplained Unusual Share Price Movements

      11.A third cause for suspension is if there are unexplained unusual movements in the price or trading volume of a company's listed securities. This may be caused by the uneven dissemination/leakage of price-sensitive information in the market or because the market in the stock is being deliberately manipulated. Although sharp, sudden increases/decreases in price/volume suggests that the market in the particular stock may be unfair, disorderly and/or misinformed, not all such cases are regarded as indicative of an unfair, disorderly and/or misinformed market.

      12.The considerations for suspending the trading of listed companies with unexplained unusual share price movements include:

      • the relative movement of the market;

      • the performance of the stock itself relative to the overall market and similar stocks and relationships to fundamentals;

      • price movement within a day and cumulative price movements within several consecutive days;

      • the relativity between price and volume changes, since significant price change on very low volumes might merely be indicative of the forces of supply and demand;

      • turnover as a percentage of the company's issued share capital;

      • whether the company has recently announced any corporate activities; and

      • market sentiment, including research reports recommending actions on the stock.

      For this reason, it is not possible to establish numerical criteria, such as an X percent rise/drop in price or a Y increase in volume, for the mechanical suspension of particular stocks.

      13.When the unusual price/volume movements cannot be explained by such factors, the Exchange contacts the issuer to find out whether the company is aware of the reasons for the unusual price/volume movements. If the company indicates that there is news which might have an impact on its stock, it is requested to announce the news immediately. It might be necessary to suspend the stock for a short period while the company prepares the announcement and clears it with the Exchange. If the reply is in the negative, the company is requested to issue an announcement (a "Paragraph 39.2 Announcement") to that effect and the stock is allowed to continue trading. It would, however, be closely monitored to see if the unusual trading persists.

      14.If the unusual trading activities persist after the issue of a Paragraph 39.2 Announcement, the Exchange would normally request a suspension pending the release of a detailed announcement on the company, including information regarding its recent business developments, financials, future plans, net asset value and prevailing price earning ratio to ensure that the market in its shares can be undertaken on a fully informed basis. The suspension would be lifted once the detailed announcement has been made, unless, of course, the SFC is also inquiring into the trading activities to determine whether the movements are a result of market manipulation, insider trading and/or other trading malpractices.

      15.Such inquiries usually involve identifying the nature and source of the buying/selling activity. However, unless the analysis suggests that the unusual price/volume movements were a result of market manipulation or other trading malpractices which is likely to recur if trading is resumed, trading will resume once the analysis is completed. The stock will not remain suspended pending completion of the ensuing investigation even where insider trading or market manipulation is suspected. Where the SFC is not satisfied that the market in the stock will be fair and orderly if the stock is allowed to resume trading, discussions will be held with the parties concerned to find a way of resolving the matter to enable the stock to resume trading.

      16.As analysing the nature and source of the buying/selling activities requires information from the brokers on their clients, the length of the suspension depends on how long it takes the brokers to provide the information requested and the time it takes to analyse these. Normally, it takes the brokers about a week to provide the information and 2 to 3 days to undertake the analysis. In the current market conditions, the back offices of most brokers are under heavy pressure and preparation of such information represents a further drain on their resources and might take longer than usual. However, the overwhelming majority of the brokers have been most cooperative and have given the SFC maximum assistance to enable such analysis to be undertaken in an efficient and effective manner to facilitate an early resumption of trading. With such assistance, the SFC has been able to keep such suspensions to less than two weeks.

      17.To ensure that such requests for information are kept to a minimum and to expedite the analysis, a range of measures to help focus such requests and to automate the process have been introduced. These include computer analysis of trading patterns to target active brokers, facsimile transmission of Section 31 notices and requesting data in electronic form wherever possible.

      18.The number of suspensions due to unusual price or trading movements amounted to 14 in June, 17 in July and 29 in August, or about one third of all suspensions during the period.


      19.The objective of suspensions is to ensure a fair, orderly and fully informed market to preserve the integrity of the market and to protect the investing public. These are statutory duties imposed on the Exchange and the SFC. In carrying out such duties, both the Exchange and the SFC are keenly aware of the need for and the desirability of maintaining a continuous market. Every effort is, therefore, made to strike a proper balance between the two opposing requirements and to keep trading suspensions to the minimum required. If it is unavoidable, the Exchange and the SFC endeavour to ensure that such suspensions last as short as possible. To help cope with the work, the number of staff resources has been increased. In addition, the Exchange and the SFC is considering further ways and means to improve coordination in these matters and to expedite and to focus such work.

      Prepared jointly by:Securities and Futures Commission
      The Stock Exchange of Hong Kong Ltd.

      September 8, 1997