Hong Kong Exchanges and Clearing (HKEx) is considering reinstating closing auctions, a move supported by international players but strongly opposed by local brokers.
Exchanges in most countries use auctions to set closing prices through tender, with the most common order becoming the closing price. Hong Kong adopted the system in May 2008 but suspended it 10 months later after a huge swing in the share price of HSBC, the most widely held stock in the city.
HKEx now uses the median price from the final five transactions in a stock to calculate its closing level.
'It's clear to most of us here that we need to come up with a better mousetrap, a new way to do a closing auction, because we really do need one,' HKEx chief operating officer Gerald Greiner told Bloomberg. 'We need to cover all the concerns there were with the old one.'
But local brokerages are opposed.
'The closing auction system in 2009 pushed HSBC to fall more than 12 per cent in 10 minutes and that showed the auction system could be manipulated by bigger players,' First China Securities chief executive Kenny Lee Yiu-sun said.
'HKEx and the Securities and Futures Commission have not announced the results of their investigation [into the HSBC share price fall]. Before we know the truth about the transactions in HSBC shares on that day, there's no point bringing back the closing auction system because that may hurt the interests of Hong Kong investors.'
The commission declined to comment on the matter.
HKEx suspended the 10-minute closing auctions in March 2009 after selling pressure reached a fever pitch - one transaction in the auction's final seconds sent HSBC down by 12.47 per cent for the 10-minute period, and 24.14 per cent for the day - its worst fall in two decades.
At the time of the decision to suspend the auctions, HKEx's then-chief executive Paul Chow Man-yiu said: 'The HKEx is concerned about the appearance of abuse during the closing auction session ... There was a need to maintain public confidence in the orderliness and fairness of the market in light of recent price volatility during the session.'
Chim Pui-chung, legislator for financial services, also opposed a return to the closing auction system.
'HKEx has always wanted to match international practice but it should also safeguard the interests of the local brokerages and local investors,' Chim said. 'The auction system benefits big international players who have the money and skills ... to tender to determine the closing price while they may separately make a lot of money from issuing off-market derivative products. Local brokers and investors don't have this ability.'
But international brokers and institutional investors have asked Hong Kong to reinstate closing auctions, saying they lower volatility and give more confidence in the closing price. A Deutsche Bank April survey of institutional clients found unanimous support for its return.
Even if HKEx reinstated the auction system, it must put measures in place to prevent manipulation, Hong Kong Securities Association chairman Brian Fung Wei-lung said.