HKEx to Add Closing Auction; Sell Stakes in OTC Clearer

Hong Kong Exchanges and Clearing Ltd. plans to reintroduce a closing auction for its cash equities market, Chief Executive Charles Li told reporters today. The world’s No. 1 bourse operator by value will sell off stakes in an over-the-counter derivative clearing subsidiary.

The Hong Kong bourse operator suspended the auction in March 2009 after large moves at the end of the day spurred concerns about price manipulation. Exchanges in most countries use auctions to set closing prices by pooling share orders and finding the level at which the most can be matched.

“It is something we will absolutely do,” Li said. “But it is something we will do with a lot of consultation and time spent so that people really truly understand it and at the same time the big major investors who are really dying for these services will be able to get it.”

Hong Kong Exchanges, which regained its place as the world’s biggest exchange operator by market value in December, wants to become a hub for investors seeking access to China and for Chinese hunting for global assets. The U.K. Financial Services Agency approved Hong Kong’s takeover of the LME, the venue for more than 80 percent of metals trading, in November.

The closing auction process, shunned only by Hong Kong and Shanghai among the 10 biggest markets worldwide, may reduce volatility and limit manipulation, according to a 2006 paper tracking the introduction of the process at Singapore’s stock exchange. Hong Kong now uses the median price from the final five transactions in a stock to calculate its closing level.

Manipulation Concerns

International brokers and institutional investors have been asking Hong Kong to reinstate the auction for certainty in attaining the closing price while local independent brokers oppose the auctions, saying they are a manipulation tool for the bigger players.

“The people who don’t like closing auctions usually don’t like it for the wrong reasons,” Li said. “There is a strong fundamental need for this for us to have it in Hong Kong if we want to be a real international market.”

Li declined to give any timeline for reintroduction of the auction, saying he wanted to make sure there was a consensus among market participants.

Hong Kong Exchanges will also focus on expanding its derivatives offering this year, Li and Romnesh Lamba, co-head of global markets, said at the press briefing. The bourse operator plans to open its over-the-counter derivatives clearinghouse in April.

Founding Members

“Right now, we are in the process of creating a founding-member program where we’re planning to sell a minority stake in our OTC clearing subsidiary to around 12 mainland and international banks,” Lamba said. “We hope by doing this we will secure a lot of volume in our OTC clearing.”

Clearinghouses cut risk by collecting collateral at the start of each transaction, monitoring daily price moves and making traders put up more cash as losses occur. Traders have to deal through clearing members, typically the biggest banks and brokerages. Unlike privately traded derivatives, prices for cleared trades are set every day and publicly disclosed.

The company will introduce after-hours futures trading this year, Lamba said.

The bourse operator is planning to build trading, clearing and market-data platforms that will cater to all asset groups, Li said. It is considering introducing fixed-income and commodity derivatives, he said.

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