Stock market closing auction a fine balance

The stock market in Hong Kong has an existing pre-opening period for order placement. However, a closing auction has been re-introduced by regulators and operators. The latter says that this new auction will be a much improved version of the old system.

Trading hours extended

Adoption of this latest system means the trading hours are extended by about 10 minutes at 4pm. This extension will be done by utilizing a tender method. This determines the closing price of a stock depending on the matching prices taken from last minute orders’ biggest volumes. It substitutes the general closing method which uses the average price of a total of five snapshots. These snapshots are taken during concluding minute of trading. The trading volume is not taken into account.

The new system has both its supporters and detractors. The former says that it will be open to both retail investors and professional fund managers-and thus eliminate the arbitrary pricing at end of trading day. This enhances price discovery and efficiency. Detractors of the new system says tat professional traders could use the system to manipulate prices during the concluding minutes.

System wars

The battle over the new system is between the city’s large fund houses and small brokers. The large fund houses are happy with the new developments and now asking for increased unrestricted trading at market close. The new system is a compromise between the two opposing camps The regulators and operators of the exchange try to develop local markey in accordance with international practice.

The system of closing auction has been introduced in Hong Kong only a short while ago. Among the developed economies, it is the last to do so. The closing auction was initially launched in 2008. The system soon came under heavy criticism for being easily manipulated when heavy swings were noticed in prices of shares during tender period. The exchange suspended the system only after 10 months.

The relaunched system added price restrictions to auction so that disasters do not happen repeatedly. The input orders during this period cannot be higher than five percent or get lower than reference price. The latter is set at 4pm. There was also an inclusion of a random close during a trading’s last two minutes.  Since there was no random closing or price limit in 2008 launch, the system can be easily manipulated.

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