HKEx to decide in coming weeks on plan to curb closing volatility

[HONG KONG] The Hong Kong stock exchange said it expects to make a long-awaited announcement in coming weeks on a controversial proposal to rein in volatility which large investors favour but small investors say discriminates against them.

Under the proposal, unveiled in January, Hong Kong Exchanges & Clearing (HKEx) plans to introduce a so-called closing auction and other volatility curbs that would bring it in line with international peers in New York and Europe.

But Hong Kong's influential local retail brokers, who were burnt during a previous attempt to introduce a closing auction, have opposed the idea saying it could give rise to market manipulation and disadvantage small local investors and traders. "We are against it, we take a firm stand here," said Patrick Lam, chairman of the Hong Kong Securities & Futures Employee Union, which represents traders at Hong Kong securities firms."It's unfair for individual investors."

International brokers and fund managers, on the other hand, say the measures are critical to Hong Kong's status as an international financial centre, and the situation is becoming urgent following a record-breaking rally that is likely to see global investors allocate more of their portfolios into Hong Kong stocks.

Sally Wong, chief executive of the Hong Kong Investment Funds Association, which represents global investors, said the proposal "should be implemented as soon as possible".

All major stock exchanges use an auction at the end of the trading day to reduce volatility when calculating closing prices. Buy and sell orders are pooled during a five or 10 minute period and are then matched at the best available price.

In Hong Kong, the closing price is based on continuous trading, whereby orders are matched immediately.

According to research by State Street Global Advisors published in 2012, volatility in Hong Kong during the close period can be as much as six times greater than in other developed markets.

The HKEx launched a closing auction in May 2008 but scrapped it 10 months later after design flaws actually exacerbated price swings, leading to fears the mechanism could give rise to market manipulation.

Christopher Cheung, who represents financial services within Hong Kong's Legislative Council, said he some other local broker groups are pushing for the exchange to scale down the proposal. "It's not that we are against any idea, we just want it to be fair for everyone. We just need to defend the closing auction system from being a tool for manipulation," he added.

In a statement, the HKEx said it was still reviewing responses to its consultation, adding: "We plan to issue a consultation conclusions paper in the first half of this year...indicating the way forward."

REUTERS