HKEx CEO says closing auction to curb abuse, help index trackers

[HONG KONG] Hong Kong Exchanges & Clearing Ltd Chief Executive Officer Charles Li said the proposed reintroduction of daily closing auctions for equities will mitigate market manipulation and make trading smoother for institutions.

The planned system, which seeks a single price to maximize the number of buy and sell orders matched at the end of each session, would apply to a limited number of heavily-traded stocks and impose an order entry band of 5 per cent during the auction. The bourse will publish results from a January consultation paper on the proposal later this month.

A closing auction would bring HKEx in line with most developed markets and help institutional investors, who account for about 58 per cent of turnover, improve their ability to track indexes by executing trades at the close. HKEx says the system also makes it more expensive for any one trader to manipulate price levels.

"The whole idea of this is not only to help major institutional investors to do what they do, but at the same time make them less vulnerable to abuse," Mr Li said in an interview on Thursday.

The bourse plans to introduce both the closing auction and volatility controls for equities next year. The volatility curbs would prevent moves of more than 10 per cent in a stock over a five-minute period.

HKEx directors have approved the closing auction and volatility measures, the South China Morning Post reported on Thursday. Mr Li declined to comment on the report.

The closing auction system isn't immune to manipulation by traders seeking to influence end-of-day prices, said Jeffrey Chan, chairman of the Hong Kong Securities Association Ltd., which represents retail brokerages in the city.

"There are ways to manipulate the market no matter what market structures you have," Mr Li said. The exchange will assist the market regulator to monitor trading for any irregularities, Lorraine Chan, a spokeswoman at HKEx, wrote in an e-mail.

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