Hong Kong brokers accept closing auction but want lower price limit

After a lengthy debate, Hong Kong stockbrokers have finally accepted the stock exchange proposal to relaunch an auction system to determine stock closing price.

But they are urging the exchange to add more restrictions to prevent manipulation. This is at odds with institutional investors who also want the closing auction to be relaunched but with as few restrictions as possible.

Stock markets in most countries use auctions to set closing prices through tenders by traders, with the most common order becoming the closing price. Hong Kong calculates the median price of the last five orders to determine the closing price, sometimes leading to excessive bidding to influence prices.

Hong Kong Exchanges and Clearing board of directors will on Wednesday decide if the exchange should reinstate the closing-auction session that it shut down after only 10 months of operation in 2009 following charges of market manipulation.

The exchange in January proposed to reinstate the system to keep up with international practice. To mitigate the concerns of brokers, it suggested imposing a 5 per cent price limit for the closing-auction period. Another proposed control measure to reduce price manipulation would involve the introduction of a random closing time so investors do not know when the auction will end.

"The proposed closing auction system has more restrictions than the one scrapped in 2009. It is more acceptable and brokers generally agree the enhanced system should come back," said Christopher Cheung Wah-fung, a broker and lawmaker for the financial services sector.