Can HKEX avoid another ‘mess’ when closing auction session is revived on Monday?
Stockbrokers claim order prices capped at 5 per cent from the reference price will not prevent the chaos that ensued after the pricing mechanism’s first launch in 2008
Concerns remain over plans by Hong Kong Exchanges and Clearing (HKEX) to reintroduce a closing auction session on Monday (July 25), with stockbrokers particularly still worried that the chaotic scenes experienced by its predecessor mechanism, eight years ago, could be repeated.
HKEX says the new mechanism have been fine-tuned in that time, and that it is responding to a strong industry need to execute trades at securities’ closing prices.
While fund managers and institutional investors believe the move is needed to boost turnover and to keep the city in line with international markets.
But Christopher Cheung Wah-fung, a lawmaker for the financial services sector who is a broker himself, says the local broking community still has serious doubts over the controversial relaunch, which will use the tender method to determine closing prices.
“When it was first launched in 2008, it was a mess and there was a lot of manipulation during the tendering period,” Cheung said.
Hong Kong’s existing continuous auction mechanism determines the closing market price using the median of five snapshots taken during the last minute of trading, without taking into account trading volume.
That in turn, say critics, forces market participants to place their market-on-close orders at the very end of the closing time and this leads to significant price swings.
From Monday, the reference price will be set in the first minute of the new 10-minute closing session.
That will be followed by a five-minute order input period, when order prices will be capped at 5 per cent from the reference price.
There will then be a 2-minute no-cancellation period and a 2-minute random closing period, when orders can be placed within the lowest-ask and highest-bid prices.
But Cheung said local brokers believe the 5 per cent threshold during the tender period should be set at 2 per cent.
“If after the relaunch we continue to see alleged manipulation, we would demand the cap be changed to 2 per cent,” he said.
HKEX launched a 10-minute closing auction period in May 2008 without a price limit in a bid to match international practise.
But unlike normal trading sessions that continuously matched orders, it allowed traders to tender for shares, with the biggest tender determining a stock’s closing price.
The first closing auction session, however, was heavily criticised by brokers, who said it was easily manipulated if there were heavy swings in share prices during the tender period.
The exchange suspended it after heavy selling pressure on March 9, 2009, sent HSBC down 12.47 per cent during the 10-minute auction period.
It then reverted to its previous method of closing the market at 4pm and using the median of five snapshots in the last minute of trading, taken at 15-second intervals.
After the gap of eight years and market consultation, the relaunch is scheduled for Monday, with the closing auction session planned between 4pm and 4.10pm.
Hong Kong Investment Funds Association chief executive Sally Wong, said fund managers believe the 5 per cent price cap is reasonable, and is hoping the threshold could be increased to 7 per cent or 10 per cent.
“We believe 5 per cent is the optimal level. Based on the most recent historical data in Hong Kong, a percentage lower than that would be overly restrictive to trading,” she said.
She said if the price limit were set at 2 per cent, as many local brokers suggest, about 10 per cent of stocks would not find a closing price using the tender method.
“A closing auction system is virtually a global norm, as all developed markets and most emerging markets have this in place already,” Wong said.
“The system has been proven to be an efficient mechanism to meet investors’ trading needs.
“We understand that certain quarters have concerns about potential price manipulation that a closing auction system can give rise to. But we believe the measures to be implemented by the HKEX will go a long way to addressing these concerns,” she added.
“Hong Kong can’t take itself seriously as a global market without a closing auction,” McGonegal said.
“We are not talking about some new feature that is potentially a bell and whistle, we are talking about a feature that is a standard in all major markets.
“In a world of technical detail and limitless technology, its very hard to allow an arbitrary closing price to 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.
Ken Wong, Asia equity portfolio specialist at Eastspring Investments, said in many developed markets that use the closing auction session to determine closing prices, as much as 10 per cent of turnover happens during the closing auction period.
“The relaunch is one method the exchange can try to increase daily market turnover, given the fact that has been so low in Hong Kong this year,” he said.
“Hong Kong is the last of the 22 developed markets included in MSCI [MSCI’S all-country world stocks index] without a closing auction, so it makes sense to relaunch it.”