By Hanny Wan and Kelvin Wong
March 10 (Bloomberg) -- HSBC Holdings Plc’s 24 percent plunge in Hong Kong trading yesterday prompted a government probe and the exchange to consider bringing forward changes to end-of- day trading processes. The stock rallied 15 percent today.
The Securities and Futures Commission is investigating trades put through at yesterday’s close, Financial Secretary John Tsang told reporters today in comments broadcast by local television. Hong Kong Exchanges & Clearing Ltd. may accelerate the implementation of a 2 percent cap on stock fluctuations during so-called closing auction sessions, a spokesman said.
“Yesterday’s closing auction exposes the flaw in our stock trading system that allows these kinds of trades,” said Chim Pui-chung, a Hong Kong legislator who represents the financial services industry. “The SFC needs to take responsibility for this and to investigate immediately, and release their findings to let investors know what happened.”
The closing auction process, used by the exchange Since May last year, has attracted criticism from lawmakers and investors who claim it distorts stock pricing. The session extends trading by 10 minutes from the original 4 p.m. local time close, during which buy and sell orders are matched by an auction trading mechanism.
Four days after the closing auction was introduced, eight stocks fluctuated by more than 10 percent from the last traded price at 4 p.m., which the Hong Kong Exchanges said was due to a rebalancing of MSCI Barra indexes.
‘Annoys The Market’
“It annoys the market and especially retail investors,” said Andrew Sullivan, a sales trader at Mainfirst Securities Hong Kong Ltd., referring to the stock fluctuations during the closing auction sessions.
The sessions are an international practice aimed at providing a “fair and market-driven method” to determine closing stock prices, the exchange said in October 2007 when it announced the new system.
Hong Kong Exchanges said March 5 that it planned to implement a 2 percent limit on the changes of stock prices within the auctions on June 22.
“Our plan hasn’t changed, but we can’t rule out the possibility of pushing the plan forward,” spokesman Henry Law said in an interview today. “It depends on how soon the market can upgrade their trading system.”
All brokerages need to finish testing the parameters they set for the closing auction session before the exchange can go ahead with the new volatility cap, he said.
HSBC Shares Rally
The bourse said in November 2008 that the Tokyo Stock Exchange, Korea Exchange, Taiwan Stock Exchange, and Shenzhen Stock Exchange had price controls in their closing auction sessions, whereas the New York Stock Exchange, London Stock Exchange, and Australian Securities Exchange do not.
HSBC, the second-largest constituent on the benchmark Hang Seng Index, tumbled 24 percent yesterday, the most in at least 23 years. The stock fell more than 10 percent during the closing auction session, dragging the shares to the lowest since May 1995. The shares rallied 15 percent today to HK$37.80.
“HSBC is a very unique stock and it has an intricate relationship with Hong Kong people’s lives,” said legislator Chim. “When it fluctuates like yesterday it has a huge impact on people’s sentiment and wealth.”
To contact the reporters on this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net; Kelvin Wong in Hong Kong at kwong40@bloomberg.net.
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