Date
24 January 2017
The Hang Seng Index closed down 41 points at 4 p.m. on Aug. 23, but staged a U-turn during the closing auction and eventually ended with a gain of one point. Photo: HKEJ
The Hang Seng Index closed down 41 points at 4 p.m. on Aug. 23, but staged a U-turn during the closing auction and eventually ended with a gain of one point. Photo: HKEJ

Closing auction session: does it work?

The Hong Kong stock exchange reintroduced the closing auction session a month ago, and it’s about time we took a look to see if it’s working properly.

The closing auction session was first launched in 2008, but was suspended after it led to abnormal share price swings, as seen in an incident involving shares of HSBC Holdings (00005.HK).

Closing auction session is aimed at preventing market manipulation by participants who, for example, place large orders right before the close of trade to create huge volatility.

On March 9, 2009, HSBC slumped 15 percent to HK$37 by 4 p.m. market close. The shares took a further 10 percent plunge to HK$33 within the 10-minute closing auction session.

However, the next day, the stock rebounded to close at HK$37.6.

Hong Kong Exchanges and Clearing (HKEx, 00388.HK) then suspended the mechanism amid widespread criticism by investors.

This time, HKEx has refined the mechanism before its reintroduction.

Compared with the previous absence of limits to share price movements, HKEx this time allows securities to move by a maximum of 5 percent, either up or down, during the auction period.

It has also added a random closing rule to close the market anytime it thinks fit, making it much harder for participants to manipulate share prices.

The bourse operator also warned that the Securities and Futures Commission might take further action if there is any abnormal trading activity detected during the closing auction session.

The system has operated smoothly so far. Still there have been some anomalies.

For instance, the Hang Seng Index closed with 41 points down at 4 p.m. on Aug. 23, but it staged a U-turn during closing auction and eventually ended with a gain of one point.

Meanwhile, Tracker Fund of Hong Kong (02800.HK) reported a short-selling ratio of 35 percent that day.

That has stoked speculation that some big players had deliberately pushed up the benchmark in closing auction to get better prices for their short-selling trades.

The index fell 178 points the following day.

However, it’s hard to confirm what really happened.

Most stock exchanges around the world have similar closing auction systems. But such systems are not perfect; no system is.

There is a need for such an arrangement because it facilitates block trades when fund managers have to rebalance their positions in reaction to events like changes of benchmark indices such as the MSCI and FTSE.

This article appeared in the Hong Kong Economic Journal on Aug. 25.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

CG

Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe