Closing Auction Session (CAS)

CAS would last for about 8 to 10 minutes and consists of a Reference Price fixing period, an order input period, a no-cancellation period and a random closing period as follows:

Only at-auction orders and at-auction limit orders can be input starting from 16:01 starting from the beginning of the Order Input Period in CAS.  All other order types, such as limit orders / enhanced limit orders / special limit orders / odd lots / special lots, will be rejected during CAS.  

Currently the System only accepts limit, enhanced limit and special limit orders during the CTS and orders are continuously executed in strict price and time priority. There is no order type in the System for input order in CTS but could only be executed at CAS.

A two-stage price limit is applied to control the price of limit orders which are either carried forward from the CTS to CAS, or newly input during CAS.

Carry forward of outstanding orders into CAS

• Outstanding orders within the permissible price limit (i.e. buy order <= upper limit and sell order >= lower limit), including short selling or market making orders, will be automatically carried forward from CTS to CAS.  The System would treat such orders as at-auction limit orders.

• In Stage 1, aggressive orders with price outside the permissible price limit (i.e. buy order > upper limit and sell order < lower limit) will be cancelled by the System with an order cancellation message returned to the relevant EP.  Passive orders with price outside the permissible price limit (i.e. buy order < lower limit and sell order > upper limit) will remain on the order book but will not be executed at the end of CAS.  In Stage 2, any at-auction limit orders with limit price outside the price limits when the second stage price limit takes effect will not be cancelled by the system but would not be executable during CAS.

New order input during CAS

• At-auction orders and at-auction limit orders within the ± 5% of the Reference Price can be entered starting from the Order Input Period.  An at-auction limit order that is input during CAS and which has a limit price is outside the permissible price limit will be rejected by the System.

• Starting from the No-Cancellation Period, the price limit may be further tightened and is set at the highest bid and the lowest ask of the order book at the end of the Order Input Period as recorded at 16:06.  This price limit will remain unchanged for the whole period of No-Cancellation and Random Closing Periods.

HKEX acknowledged the market’s concern on price volatility in CAS, so it proposed implementing a price limit.  It should be noted that most markets do not have a price limit in their closing auction, and a 5 per cent price limit is the narrowest among those with a price limit.     

When HKEX had a closing auction in 2008, it announced at one point that it would implement a 2 per cent price limit, but the closing auction was suspended before the limit was implemented.  The price limit was the only proposed measure to curb price instability then and hence a 2 per cent limit was proposed, although many market participants commented then that it would be too restrictive to trading.  CAS has a number of other price control measures so the price limit need not be as restrictive as a 2 per cent limit. 

Based on daily trading statistics, a 2 per cent limit would be overly restrictive to trading and would make it difficult for many stocks orders to be completed at the close both on normal days as well as on index rebalancing days.  Market participants might place orders with more aggressive prices or trade ahead of the market close under such circumstances and hence reduce the utility of CAS.  Also, HKEX noted that even today, some stocks may fluctuate more than 5 per cent within a few minutes, and the 5 per cent price limit is still not wide enough for these stocks.

HKEX have therefore decided to proceed with the original proposal, i.e. introducing a 5 per cent price limit first during the Order Input Period, which balances retail and institutional market feedback and the strong need to address the price volatility issue.  The 5 per cent price limit may be subject to review in the future. 

In Phase 2, input of short selling orders in CAS, as at-auction limit orders with a price not lower than the CAS Reference Price (“tick rule in CAS”), will be allowed for designated CAS securities which are eligible for short selling.  However, input of short selling at-auction orders will continue to be disallowed.  In addition, other price checks applied on the existing at-auction limit orders today, such as the two-staged price limit, will also be applicable to short selling orders input in CAS.

It should also be noted that outstanding short selling orders, which are input during the CTS and with order prices higher than or equal to the lower price limit (i.e. order price >=95% of Reference Price), will be automatically carried forward to CAS.  All these orders will be treated as at-auction limit orders.

Hang Seng Index Futures, H-shares Index Futures, Mini-Hang Seng Index Futures, Mini H-shares Index Futures, Section Index Futures and Stock Futures

The final settlement price (FSP) calculation algorithm remains unchanged, except the last reading in the FSP calculation algorithm is taken when the closing indices and closing underlying stock prices are disseminated at the end of CAS in the SEHK.  The mechanism to take the other readings remains unchanged as compared to before CAS implementation.

Stock Options

As Stock Options are physically settled, no FSP is calculated.  Open options contracts which are 1.5% or more in-the-money are auto-exercised upon expiration, given there are no prior overriding instructions from the broker.  Please note the auto-exercise of Stock Options makes references to the closing price of the underlying stock, which would be determined in CAS for names that are eligible.

Volatility Index Futures

The FSP determination period on full day trading remains unchanged, whereas on half day trading the FSP determination period is changed from 11:15 – 11:45 to 11:30 – 12:00.