Exchange operator Hong Kong Exchanges and Clearing (HKEx)’s plans to impose price restrictions in its closing auction could reduce trading volumes in the session and may not be effective at reducing manipulation and gaming, according to some market participants.
On Friday, HKEx announced its intention to limit price movements in the auction to 2% of a stock’s nominal price at 16.00, when continuous trading closes, following a consultation period that began in November last year. The limit is intended to curb extreme price fluctuations, and is tentatively scheduled for implementation in Q2 this year.
Traders who need to fill large orders in the closing auction may find themselves restricted, according to one buy-side trader, because there may not be enough liquidity within the new limits.
“I think the solution is a bit short-sighted,” the trader told theTRADEnews.com. “It will probably take volume away from the close because a lot of traders want to get done one way or another, and if you limit the closing price to a 2% swing, you are not going to be able to get done at certain volume levels.”
In turn, this restriction could deter traders from participating as heavily in the auction. “Clients are going to know ahead of time that they had better get the majority of their order done early rather than dumping it in the close,” the trader said.
A further problem with the proposed limit, according to John Fildes, managing director of agency broker Instinet Pacific, is that it does little to prevent manipulation and gaming. To this end, he thinks the exchange should have implemented a random closing time in the auction, as employed by others such as the London Stock Exchange and Deutsche Börse.
“The option of a random close was the main thing people brought up last year when the closing auction session was introduced,” said Fildes. “However, when the consultation paper came out in Q4, it completely excluded the random closing option.”
In the conclusions drawn from the consultation process, HKEx noted it had received suggestions of implementing a random closing time to the closing auction. However, it added that the current order trading mechanism does not allow exchange participants to cancel or amend orders during the pre-order matching period, which it says prevents significant changes to the indicative equilibrium price.
The exchange acknowledged that random closing times might deter gaming, but pointed out gaming might still occur in the period before random closing. Furthermore, the exchange said that aggressively priced orders in the first one to two minutes of the closing auction and order imbalances of particular securities are the key reasons for big price movements rather than last-minute order cancellations and amendments, and neither random closing times nor the existing trading mechanism can affect these phenomena.