White CollarHong 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.