Muted response to HK’s new system to calculate closing share prices
Relaunched closing auction session has turnover of HK$1.1 billion, just 2.2pc of HKEX’s full-day volume
The controversial relaunch of a new and improved system to calculate closing share prices in Hong Kong, met with muted market response on Monday.
Hong Kong Exchanges and Clearing (HKEX) revealed 290 brokers took part and 282 stocks were traded during the new closing auction session’s debut, amounting to a turnover of HK$1.1 billion, or just 2.2 per cent of the full-day’s turnover of HK$49.39 billion.
Brokers said the volume was way below overseas market levels, where the auction period normally accounts for 10 to 30 per cent of all turnover.
The biggest difference between the old and new system is the added safeguard of a 5 per cent price cap during the option period, which HKEX hopes will stop big players with large volumes of orders from influence closing prices.
Louis Tse Ming-kwong, director of VC Brokerage, said as it was the first day for the revamped system, trading was tentative, added to the fact the market overall was waiting for a slew corporate trading figures this week, and a decision on interest rates from Japan and the US.
“In addition, this is only the first phase of the closing auction and only Blue Chips are included, and not the smaller stocks,” said Tse.
Ken Wong, an Asia equity portfolio specialist at Eastspring Investment, is one of the fund managers still waiting to decide whether to trade during the new session, and said he plans to monitor the closing auction before making a final decision.
“We did get some fairly good additional volume on day one [of the session] for certain stocks,” he added.
He used Tencent as a strong example, however, of the effect the new system could have on Blue Chip trading.
He said an additional 9.4 per cent volume was added to the company’s full-day’s turnover during the closing auction session, representing an extra 670,000 Tencent shares traded.
Hong Kong is the last of the 22 developed markets in MSCI’s all-country world stocks index to adopt a closing auction system to calculate closing prices.
The exchange had first adopted the system in 2008 — but ten months after its first launch, HKEX suspended the system after heavy selling pressure on March 9, 2009, sent HSBC down 12.47 per cent during the 10-minute auction period.
Starting Monday, stock market trading hours were extended by 8 to 10 minutes with the addition of the closing auction session that uses the tender method to determine a stock’s closing price based on matching prices from the largest volume of input orders placed during the auction period.
The new system replaces the traditional method of closing, that used the median price of five snapshots taken during the last minute of trading, without taking into account trading volume.
To prevent a repeat performance to 2009, the relaunched system has added a price limit to the auction so that input orders during the period cannot be 5 per cent higher or lower than the reference price set at 4pm.
It has also added a random close during the final two minutes of trading. There was no price limit or random closing in the 2008 launch, which made it easier to manipulate.
Brokers, however, fear the 5 per cent price cap is not enough , whereas fund managers have called for the cap to be set at 7 to 10 per cent.
Commenting on whether he expected a higher turnover on the first day reusing the auction system, Wong said: “There’s a no guarantee but the extended trading period and the auction session may help boost market turnover.”
Hong Kong regulators and brokers said they kept a close eye on the controversial 10-minute closing auction session after Monday’s stock market closed, with some still fearing a repeat of the chaotic scenes seen during its first launch in 2008.
Regulatory sources told South China Morning Post that the Securities and Futures Commission and Hong Kong Exchanges and Clearing have assembled a special team to closely monitor the first day of the relaunch.
Roger Lee, HKEX’s head of markets, said it had started actively engaging the market in the relaunch, right after it announced its plans for the closing auction session, to ensure market participants were ready.
“We consulted the market in January of last year and concluded in the July, to introduce a CAS-based on positive market feedback.
“With the closing auction session, we can meet market demand for execution at securities’ closing prices, and our approach to the market close is in line with the approaches of other leading exchanges.”
Veteran stockbroker Cheung Tin-sang had warned last week that chaotic scenes, similar to 2009, were likely again and has pressed for a 2 per cent cap.
“No brokers like the new way to close the market. The closing auction session, first launched in 2008, was a mess. Historical records show the system was easily manipulated by the large fund houses, and small brokers and small investors suffered [as a result],” Cheung said.
“The session allows big players with the large volume of orders to influence the closing price.
“This is not fair to small investors. We are going to see manipulation sooner or later.”
Cheung said he and other brokers have warned the government about the setbacks experienced when the closing auction session was first launched in 2008.
“On many trading days, particularly when there was index rebalancing, the closing auction session saw many stock prices swing substantially.
“Investors who traded with margin financing lost all their investment in the 10-minute session,” he said.
Unlike small brokers who dislike the system, however, large international fund houses and institutional investors have called for the Hong Kong exchange to bring back the closing auction as major markets in the US, London and other countries use it.
Brett McGonegal, chief executive of Capital Link International, said the auction would be needed because under the previous closing method investors could only guess the closing price.
The auction system will match all orders at the same price during the auction period, a process which matches the needs of the big fund companies.
“We are not talking about some new feature that is potentially a bell and a whistle, we are talking about a market feature that is a standard in all major markets. In a world of technical details and limitless technology, it’s very hard to allow an arbitrary closing price for stocks that make up portfolios that are all marked to market via an industry standard of a closing auction in all major markets outside of Hong Kong,” he said.