Hong Kong-based fund managers have welcomed plans by the HK Exchange to reintroduce a ‘closing auction’ scheme despite continuing to face strong opposition from retail investors.
The scheme, which pools buy and sell orders at the end of trading and is commonly used in other developed markets such as Japan and Singapore, was previously implemented in 2008.
But the scheme was seen by some to have contributed to the 20% drop of HSBC Holdings in March 2009, a price move that was subsequently retracted. Hong Kong then reverted back to its previous practice of determining the closing price based on the median of the last five prints of a stock.
Speaking on behalf of long-only fund managers, the Hong Kong Investment Funds Association said that reintroduction of the closing auction scheme could help lower execution cost and improve price discovery.
“Significant equity flows require execution at the closing price as a lot of funds are required to do so. Closing price is also typically used for portfolio valuations and benchmarking purposes,” the HKIFA said in a statement.
HKIFA noted that around 10% of equity flow on a normal day and at least 30% on index rebalancing days are required to trade at the close, and this is likely to increase as Hong Kong looks to become a regional fund centre.
On the other hand, many retail investors believe that closing auction schemes can be subject to market manipulation, given that larger institutional investors will have much more influence in determining the final price.
Meanwhile, the HKEx is looking to introduce a volatility control mechanism, which has the strong backing of asset managers, of which 13 out of 15 respondents to the original January consultation were in favour of the scheme.
The changes, which would come with the objective of preventing major trading incidents such as the flash crashes in the US in 2010, comes at a time of sharper volatility in Hong Kong, in part to its greater interconnectedness with the mainland market.
Under the current proposal, stocks that move over 10% against the price of last trade five minutes ago would trigger off a five minute cooling period before it is allowed to be traded again.
The plans are expected to be phased in from the third quarter of 2016, with the market given a full year of preparation lead time.
The Hong Kong Stock Exchange closed down -9.5% on Monday.