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Monday, July 25, 2016, 16:29

HKEx re-launches Closing Auction Session

By Duan Ting

HKEx re-launches Closing Auction Session

Hong Kong Exchanges and Clearing Limited (HKEx) tentatively re-launched the Closing Auction Session (CAS) in its securities market on Monday after the mechanism was suspended in 2009 due to market chaos. Experts say there is no big impact on trading in the first stage of the re-launched mechanism.

The CAS, which was previously introduced in 2008, extends the market by up to 10 extra minutes after 16:00 for a normal trading day and after 12:00 for a half day of trading, and allows investors to trade securities at the closing price.

Dennis Wu, chief executive officer at Futu Securities International (Hong Kong) Limited, believes currently the mechanism will not have much impact on their business and institutional investors will be more influenced, as in the first phase it is adapted to all ETFs and major index constituents, including constituent stocks of Hang Seng Composite large cap and mid cap index, as well as H shares which have corresponding A shares listed on mainland securities exchanges.

The CAS will be rolled out in two phases, according to HKEx. After six months and subject to a review of phase one, phase two will tentatively include all equity securities and funds, but exclude structured products and debt securities.

Benny Wang, dealing director at Phillip Securities Group, said the reaction from investors so far has been mild.

He pointed out that securities companies are well prepared and their systems have been tested many times before the launching of the mechanism.

The CAS was first implemented in 2008. It was suspended 10 months after its launch, when heavy selling pressure on March 9, 2009 sent HSBC shares down 12.47 percent during the 10-minute auction period.

Wang does not expect the chaos will repeat as the mechanism has two upgraded changes which are the 16:01 to 16:06 order input period and the last two minutes random closing period.

In the CAS model, the reference price is determined by taking the median of 5 nominal prices in the last minute of the afternoon session. After 16:00, there will be the order put period in which the system will automatically carry over orders from the afternoon session.

Roger Lee, head of markets of HKEx, said that the CAS model contains a number of enhanced features to avoid share price swings, including a 5 percent price limit, random closing period, increased transparency for sell and buy bids and the introduction of at-auction orders.

From 16:06 to 16:08, price limit is further tightened to between the lowest ask and the highest bid and at-auction orders and limit can be entered, but cannot be amended or canceled.

"The random closing period can reduce the speculative risk and ensure fair dealing,” added Wang.

According to local media, the Securities and Futures Commission and HKEx have assembled a special team of staff to closely monitor the first day of the re-launch of the system to prevent any chaos.

Due to the extension of time in securities markets, the closing times of normal trading sessions for Stock Index Futures and Options, Currency Futures and Commodity Futures and the opening time of After Hours Futures Trading will be postponed accordingly. However, the Closing Auction Session will not be implemented in derivative markets.

As to the investment mandate for many passive funds, significant equity flow requires execution at the closing price. Lee added that the mechanism will meet market demand for trade execution at securities’ closing prices and increase more opportunities of traders to get orders executed.

Hong Kong is the only one in the 22 developed markets that has not fully implemented CAS yet. HKEx’s Lee believes that the CAS and the Volatility Control Mechanism (VCM) are major microstructure upgrades to enhance the Hong Kong market’s overall competitiveness.

The benchmark Hang Seng Index closed at 21,993.44, up 29.17 or 0.13 percent in Hong Kong on Monday.

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