HONG KONG • Hong Kong Exchanges & Clearing Ltd (HKExchange), the world’s second-largest stock-market operator, is considering the reinstatement of a closing auction for equities to calm price swings, according to its chief operating officer (COO).
The Hong Kong bourse operator suspended the auctions in March 2009 after large moves at the end of the day spurred concern of 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’s clear to most of us here that we need to come up with a better mouse trap, a new way to do a closing auction, because we really do need one,” Gerald Greiner said in an interview. “We need to cover all the concerns there were with the old one.”
HKExchange is trying to regain its ranking as the world’s biggest bourse operator, a title it lost to CME Group Inc, and upgrade its trading systems amid global competition from alternative venues and as large initial public offerings (IPOs) from China slow. The bourse operator has bid £1.39 billion (RM6.93 billion) for London Metal Exchange, the world’s biggest commodities market. Greiner declined to comment on the deal.
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.
International brokers and institutional investors have been asking Hong Kong to reinstate the auction, saying it lowers volatility and gives them more confidence in the closing price. Deutsche Bank AG in April delivered a survey to the HKExchange in April in which its institutional clients unanimously asked for an improved system.
The bourse is preparing for competition by upgrading its trading platform and is trying to lure investors to its options business, which Greiner says has been slow to develop despite similarities to its flourishing warrants business.