Market Turnover


HKEx Chief Executive Paul Chow's comments on last Friday's Closing Auction Session

Market Operations
02 Jun 2008

Hong Kong Exchanges and Clearing Limited (HKEx) Chief Executive Paul Chow responded to media enquiries about last Friday’s Closing Auction Session (CAS) at a media stand-up today (Monday). Below are the key points and background information of his comments.         

1. Last Friday, 30 May, was the effective date of an MSCI rebalancing.

Details of the MSCI Barra (MSCI) rebalancing on 30 May were announced by MSCI on 6 May.

HKEx formally confirmed the Closing Auction Session (CAS) implementation on 19 May. In a circular issued on that date, HKEx reminded Exchange Participants (EPs) to pay attention to the closing auction features which may be particularly relevant when market participants wish to trade at the closing price (eg, ends of months/quarters, effective dates of index rebalancings).

MSCI rebalancing was specifically mentioned in an HKEx presentation to 200 people who attended a Hong Kong Stockbrokers event on 22 May (Thursday), and it was covered in the slides that were distributed to the event’s participants.

The MSCI rebalancing was a major event for the Hong Kong stock market as it affected 167 stocks listed in Hong Kong. Also, this time, besides the usual additions and deletions of index constituents, MSCI introduced significant changes to its indexing methodology.

According to industry estimates, over $500 billion of assets including active and passive funds are benchmarked to MSCI indices tracking Hong Kong listed stocks. Also, it was estimated that Friday’s rebalancing resulted in at least $30 billion of fund flow from passive funds tracking the relevant MSCI indices to the 167 affected by the rebalancing.

The assets tracking Hong Kong-related MSCI indices have increased substantially due to the growth of the Hong Kong securities market over the past several years.

A lot of rebalancing-related transactions, especially passive fund-related transactions, were likely to be executed during Friday’s CAS to avoid index tracking error.
2. HKEx observed that all of the sudden surge in transaction volume and price movement on Friday, 30 May, can be attributed to the MSCI rebalancing.

Over 95 per cent of turnover value during Friday’s CAS came from the 167 stocks affected by MSCI rebalancing.

Turnover value of other stocks involved in the CAS appeared not to be unusual compared with the previous four trading days after implementation of the CAS.

After Friday’s CAS, there was a discrepancy of over 10 per cent in the price of 8 stocks compared with the last traded price at 4:00 pm. Another 13 stocks had price discrepancies of 5 to 10 per cent. All 21 stocks were affected by the MSCI rebalancing (addition, deletion or major re-weighting).

The impact of the rebalancing was already reflected in some of the stocks before the effective date of the rebalancing; for example:

- Mongolia Energy (276), which was added to the MSCI China Index Friday afternoon, had seen its average traded price and transaction volume increase by 59 per cent and 410 per cent respectively in the 17 trading days after the MSCI announcement on 6 May.
- HNC (2626), which was deleted from the MSCI China Index Friday afternoon, had seen its average traded price decrease by 9 per cent and transaction volume increase by 62 per cent over the same 17-day period.

The weighting of CLP (2) in the MSCI Hong Kong Index increased from 3.06 per cent to 7.36 per cent Friday afternoon and the industry estimates that the passive and active funds needed to buy over 100 million shares for rebalancing. Some 22 trading days would have been needed to complete the rebalancing trades if the stock had continued trading at its average daily trading volume from 6 May, the day of the MSCI announcement, to 29 May. Although no noticeable changes in traded price and transaction volume were observed between 6 and 29 May, CLP’s stock had a price volatility of 4 per cent and significant trading volume of 18 million shares before 4 pm on Friday, 30 May.

On Friday, relatively high price volatility was observed for all 21 stocks affected by the MSCI rebalancing (price volatility between day high and day low ranged from 2.2 per cent to 12.2 per cent from market open to 4 pm on Friday).

HKEx’s policy is to inform the Securities and Futures Commission of any EP orders that deviate significantly from the prevailing trading price. Price manipulation is a criminal offence in Hong Kong and subject to prosecution by statutory regulators.
3. According to HKEx data, participation in the CAS on Friday, 30 May, came from a wide range of investors.

372 EPs participated in Friday’s CAS.

HKEx estimates retail-oriented EPs contributed about 15 per cent of Friday’s CAS turnover.

4. CAS is an international practice.

HKEx conducted a public consultation before the introduction of the CAS and its proposal to introduce the CAS in its current form received overwhelming support.

The CAS facilitates price formation and order execution based on market supply and demand.

CAS is an internationally proven practice. Markets such as the New York Stock Exchange, London Stock Exchange, Deutsche Bourse, Euronext, Tokyo Stock Exchange, Australian Stock Exchange, Singapore Stock Exchange and Shenzhen Stock Exchange all have a CAS similar to Hong Kong’s. In fact, Hong Kong was one of the last major markets in the world to introduce a CAS.

Although there are no mechanisms that are guaranteed to prevent market manipulation, a CAS is a significant deterrent as the costs and risks for potential manipulators are much higher than when there is no CAS. In addition, HKEx does not hesitate to refer cases of suspected manipulation to the statutory authorities for potential criminal prosecution.
5. The effective date of the next Hang Seng Index (HSI) rebalancing is 6 June.

PCCW (8) and CKI (1038) will be deleted; Tencent (700) and Chalco (2600) will be added; and the weightings of the index’s other constituents will be reduced slightly (the largest change will be the 0.245 per cent reduction in HSBC’s (5) weighting).

The industry estimates that the HSI rebalancing will result in gross fund flows from MPF funds and other passive funds tracking the index of about $2 billion (significantly less than the estimated fund flow resulting from the MSCI rebalancing on Friday, 30 May).

Updated 02 Jun 2008