Hong Kong Exchange Proposes Reintroducing Closing Stock Auction

Hong Kong Exchanges & Clearing Ltd., Asia’s largest bourse operator, proposed to reintroduce a closing auction it scrapped almost six years ago.

The current way of setting the close has caused index tracking errors, and many market participants have asked for years that a closing auction be reintroduced, Hong Kong Exchanges said in a consultation paper released today. Most countries’ bourses use auctions to set closing prices by pooling share orders and finding the level at which the most can be matched.

“The reintroduction of the closing auction will be welcomed by all investors,” Brett McGonegal, chief executive officer of Reorient Group Ltd., said by e-mail. “In Hong Kong, risk and options traders have found the closing price an elusive moving target. This is good news and allows Hong Kong to upgrade its profile and offering.”

Hong Kong currently uses the median price from the last five transactions in a stock to calculate its closing level. The bourse canceled its closing auction three days after a 10 percent drop in HSBC Holdings Plc, the biggest constituent of the city’s benchmark index, during the closing auction on March 9, 2009.

That drop extended the day’s decline to 24 percent, the bank’s biggest retreat in at least 23 years, and prompted complaints from investors, legislators and the city’s Financial Secretary John Tsang.

If reintroduced, the closing auction would initially cover the most liquid index constituents and related exchange-traded funds, which will then be expanded to remaining stocks and funds, Hong Kong Exchanges said. The consultation lasts until April 10.

The bourse operator is also proposing a mechanism to control volatility, according to the consultation paper. Under the rules being proposed, a cooling-off period would be triggered if a potential stock execution price varies more than 10 percent from the shares’ level five minutes earlier.

Investors would then be limited to trading within a fixed range for the next five minutes.

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