Hong Kong’s relaunched closing auction session avoids chaos, but will it help boost turnover?
The revamped closing auction session for Hong Kong’s stock market has survived its first week without a repeat of the mess seen when it was first introduced in 2008, but the question is whether it has delivered much benefit to the local bourse.
The closing auction session, relaunched on the Hong Kong stock exchange on July 25, has extended the trading day by eight to 10 minutes. It uses a tender method to determine a stock’s closing price based on matching prices from the largest volume of input orders placed during the session. It replaces the traditional method of using the median price of five snapshots in the last minute of trading to determine the closing price, without taking into account the trading volume.
The relaunch is controversial because small local brokers, who do not trade in large volumes and hence have little influence in the market, complained that the system could easily be manipulated by big institutional investors with big tickets orders. They have greater say in any system that takes volume into account.
The closing auction system was first launched in Hong Kong in May 2008 but was shorted lived – it was scrapped in March 2009 after many big share price swings during trading sessions. In March 2009, HSBC shares plunged by more than 12 per cent during the 10 minute closing session, becoming the proverbial straw that broke the camel’s back.
Given this history, many would ask why we need it back? Exchange operator Hong Kong Exchanges and Clearing cites international practise as the reason because Hong Kong is the last of the 22 advanced markets to adopt the system.
The revamped system added a price cap of 5 per cent during the auction period to avoid large price swings as well as a random closing time, both of which have successfully prevented chaos the second time around. With the price cap, at least we can be assured of no repeat of the 12 per cent drop in HSBC the first time around.
But the next question is whether it can really benefit Hong Kong market turnover, which some fund managers put forward as a reason for the city to bring back the closing auction. The theory is that the tender method is what many fund managers use in other markets so if Hong Kong does it then it will attract more big players to trade in the city.
However, on the first day of the relaunch last Monday market turnover fell to HK$49.85 billion, the lowest in two weeks and down from the pervious week’s average daily turnover of HK$57.85 billion – and lower than the HK$67.50 billion daily average for the first half of this year.
On Monday last week, trading during the auction period accounted for 2.2 per cent of the entire day’s turnover of HK$49.39 billion, which is far below overseas market levels where the auction period normally accounts for 10 to 30 per cent of total turnover.
This was no big surprise as many would take a wait and see attitude on the first day of the relaunch. Looking at last week as a whole, the average daily turnover stood at HK$64.79 billion, up 12 per cent from HK$57.85 billion in the previous week before the auction session was introduced. This was better than the average daily turnover of HK$62.44 billion in June, HK$60.06 billion in May and just shy of April’s figure of HK$65.45 billion.
This may prove that by adopting an internationally accepted auction session to determine closing prices, Hong Kong will be in a better position to compete for trading by institutional investors such as fund managers and insurance companies.
Hong Kong’s market turnover has fallen 46 per cent in the first half of this year compared with a year earlier because the 2015 market rally has not been repeated this year, so the relaunch of an improved closing auction session may help improve turnover.