Hong Kong Exchanges and Clearing (HKEx) has highlighted the progress made to date on its three-year plan and invited comment on the possible reintroduction of a closing auction as part of market reforms.
HKEx unveiled its three-year strategic plan in March 2010 to help develop links with mainland China and improve competitiveness with other exchanges while strengthening its technological capabilities and market structure.
The exchange abandoned its previous closing auction process in March 2009, after a 12.5% drop in HSBC shares during the 9 March closing auction was widely regarded as the result of market manipulation.
The current method of calculating a closing price involves taking an average of five price snapshots taken during the last minute of the continuous trading session. HKEx CEO, Charles Li, has acknowledged that this procedure could also lead to market manipulation.
In a summary of an article discussing the exchange's operations, released by Li yesterday, HKEx recognised the need to re-examine the existing system based on difficulties faced by market participants in trying to trade at the closing price.
“This is a technical reform and should not require the consideration of many different interests, but we understand the market had a bad experience with a similar initiative in 2008 and is concerned about the possibility of manipulation,” read the article. “We welcome input from market participants and will consider their views when we design the blueprint.”
Other measures that HKEx has proposed to enhance its global competitiveness include the narrowing of trading spreads and introducing anonymity for members. Currently, HKEx displays the identification of up to 40 brokers that have submitted trades to its platform.
“In these three areas, we will think and study carefully, balance interests, move steadily ahead and avoid rash decisions,” wrote Li.
The exchange said that improvements to its IT infrastructure would become a “top priority” in order to support its goal of becoming a comprehensive international financial centre and the preferred overseas investment centre for mainland China. The strategic plan includes the implementation of new trading and market data systems, as well as the building of a new data centre.
However, the summary note refuted suggestions that the technology upgrades were only being made to attract high-frequency trading flow.
“We do not agree with the view that enhancing our IT infrastructure favours high frequency traders or the large brokers,” read the note. “We believe Hong Kong's current market framework, which includes stamp duty, effectively limits high frequency trading.”
In terms of forging better links with mainland China – which HKEx says is driven by the internationalisation of the renminbi and the growing desire from mainland market participants to invest overseas – the exchange plans to align market opening times with the mainland, develop remote membership capabilities and introduce after-hours futures trading.