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Wednesday, November 20, 2019 
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Volatility interruption mechanism at BVB

11/4/2019

One of the constant lines of action of Bucharest Stock Exchange (BVB) aims the alignment with stock exchange practices and standards in the field, including those related to trading mechanisms and techniques.

Volatility interruption mechanism is enrolled in this endeavor of BVB, being a way of protection and an instrument of market risk management, to prevent artificial disturbances of the market price, contributing to the improvement of the prices’ continuity and ensuring a high degree of market quality.

By signaling the registration of a certain degree of price volatility, based on the demand and supply recorded for a financial instrument, the prerequisites for executing orders increase in case of registration the accentuated fluctuations of the market price for a financial instrument in a short period of time.

This mechanism will be applied within BVB starting with December 2nd, 2019, for shares in BET and BET-FI indices, as well as for the international shares from the regulated market, replacing the old mechanism of price management under volatility conditions, based on extension of the variation limits.

The mechanism can be activated for a financial instrument in the stages having auction and continuous trading types from its main market, consisting in registration of an unscheduled auction stage, that will allow participants to react to new market conditions, as follows:
    - passing the market from a stage having continuous trading type (Open type) to a stage having auction type (Pre-open type) for a short period of time, when the potential price of a trade exceeds a certain limit or
    - the extension of a stage having auction type, provided that the potential fixing price exceeds a certain limit.

The way of addressing the volatility limits through this mechanism is also managed through the specific price tunnels, as follows:
    - maximum tunnel – is represented by the maximum price variation, outside which no orders can be placed (current applicable tunnel);
    - static tunnel - is a price tunnel which has as reference the price of the last fixing registered in the current session or, if it does not exist, the reference price;
    - dynamic tunnel - is a price tunnel which has as reference the price of the last transaction, or, if it does not exist, the reference price.

Depending on the status of a symbol in its main market, the following dynamic tunnels can be activated, as follows:

the dynamic tunnel in Pre-open stage (Preopen)

if the potential opening price is outside this tunnel, then the symbol-market enters in Extended Pre-open (PreopenXT stage) for a time period, and then enters in the Open state, regardless of the value of the new potential opening price.

the dynamic tunnel in the Open stage

if the potential price of a trade is outside this tunnel or outside the static tunnel, then the symbol-market enters in Volatility Interruption stage Vi (therefore the trade is not executed) for a time period, and then it enters in the Extended Volatility Interruption stage (ViXT) or in the Open stage.

the dynamic tunnel in Volatility Interruption stage (Vi)

if the potential opening price is out of this tunnel then the symbol-market enters in the Extended Volatility Interruption state (ViXT) for a time period, entering afterwards in the Open stage, irrespective of the value of the new potential opening price

 

From the perspective of order operations, the Extended Pre-open (PreopenXT), Volatility Interruption (Vi) and Extended Volatility Interruption stages are equivalent with the Pre-open stage.

Another concept introduced together with the implementation of this mechanism aims to ensure a random time duration, between a minimum of 3 minutes and a maximum of 3 ½ minutes for the Extended Pre-open (PreopenXT), Volatility Interruption (Vi) and Extended Volatility Interruption stages - for a better neutrality and objectivity of the conditions to determine the market prices.

The application of this mechanism at the level of the main market of a financial instrument implies a correlated approach also at the level of its Deal market, by applying static variation limits, which are calculated having as mark the reference price for the static tunnel from the main market.

The calibration of the parameters applicable to the volatility interruption mechanism – values of the price tunnels, time duration corresponding to the symbol-market entities, as well as other information – was carried out based on European principles and experience in the field. Information regarding the applicable parameters are found in the document Technical specifications regarding the specific elements of the volatility interruption mechanism, on BVB’s website, in the section BVB Regulations.