The New Hong Kong Closing Auction Session - Part 2: Market Microstructure

  • The new volatility band, no entry period and random closing have positive impact on stabilizing the auction price discovery process
  • 95% of the time, HSI members’ closing price deviates less than 0.5% from the last min VWAP in the continuous session
  • Stability of the auction process leads to high predictability of the closing auction volume

One key new feature of the Hong Kong closing auction session (CAS) is the 5% price band. Auction orders must be executed within 5% of the reference price, which is the median of five snapshot prices in the final minute of the continuous trading session. The intention is to improve stability in the price discovery process and avoid manipulation.

The closing prices have been stable in the first four weeks of the CAS release. For HSI members, 95.9% of the cases have the closing price less than 0.5% from the last minute VWAP, whereas, non-HSI members have a slightly higher volatility with 86.9% of the cases. Closing prices never go beyond 2% from the last minute VWAP for CAS-enabled stocks.

Distance between closing price and the last minute VWAP

During the auction process, the theoretical price converges to the closing price in a linear fashion. On average, the theoretical price is about 14bp different from the final closing price in the beginning of the auction session. The difference then decreases to about 3bp when entering the order entry only period at 16:06, and further reduces to 1bp when the random closing period starts at 16:08. The price discovery process is similar between HSI members and non-HSI members.

Distance between theoretical price and the final closing price

The order entry only period (16:06 – 16:10) appears to stabilize the order book building process. On average, theoretical volume starts at about 60% of the final closing volume. Then it gradually increases to about 80% at 16:03, and reaches over 90% at 16:06 when the order entry only period starts. This implies that 10% of the volume will come after the theoretical price and volume become stable at 16:06.

Theoretical volume as percentage of the final closing auction volume

Another indication of stability is the high predictability of the auction volume. By regressing the closing volume on the theoretical volume at different time snapshot, we found that predictability (R-squared) increased to 80% after just 2 minutes into the CAS for HSI members. The predictability for both HSI members and non-HSI members then reaches 90% when the order entry only period starts at 16:06. The high predictability of the closing volume can provide an earlier and better guideline for investors to control their participation and market impact.

r-squared from regressing the closing auction volume on theoretical volume

From our analysis, the newly introduced price band and the order only entry period have a positive impact on stabilizing the auction process. The stability also induces higher predictability of the closing auction volume, particularly for the HSI members. Investors could leverage the stability and seek better execution in the new Hong Kong closing auction. Bloomberg Tradebook’s closing auction algorithm manages the operational idiosyncracies of the auction. Participating in the auction it isn’t always straight forward, and uses the predictive price algorithms to try and optimally place your orders to maximum fill.



Request a demo.