Hong Kong Exchanges and Clearing Limited (HKEx) has announced plans to suspend the closing auction session (CAS) in its securities market from 23 March 2009 subject to the approval of the necessary rule amendments by the Securities and Futures Commission (SFC) and market readiness.

The auction system was criticised earlier in the week after a plunge in HSBC shares, but this was not cited as the reason behind move.

It said the decision was made due to its concerns about any appearance of abuse during the CAS and the need to maintain public confidence in the orderliness, fairness and transparency of the market in light of recent price volatility during the CAS.

Under the new proposal, the securities market will close at 4 pm and HKEx will use its pre-CAS method for calculating closing prices for securities (based on the median of five snapshot nominal prices taken during the last minute prior to the end of the market's afternoon session) from 23 March 2009; and trading of stock index futures and options in the derivatives market will end at 4:15 pm from 23 March 2009.

This will effectively bring the securities and derivatives markets back to the trading arrangements before the CAS was introduced in the securities market on 26 May 2008. Trading of stock options and futures will remain unchanged and close at 4:00pm.
For the securities market, HKEx will offer a series of free end-to-end test sessions on 13 March and from 16 to 20 March 2009 to all Exchange Participants (EPs) with Broker Supplied Systems and testing lines in place.

For the derivatives market, free test sessions for OAPI, OMnet Application Programming Interface, will similarly be provided to EPs with testing lines on 13 March and from 16 to 20 March 2009. ]

As a result of the proposed suspension, CAS changes scheduled to take effect from 22 June 2009 - which would have limited the rise and fall of stocks to 2% of their regular closing price - have been cancelled. HKEx said it will continue to explore possible alternative CAS arrangements, including improvements to the 2% price control mechanism, in view of the recent price volatility during the CAS.

Meanwhile, the Securities and Futures Commission (SFC) of Hong Kong confirmed it has begun a formal investigation into the conduct of the closing auction session held on 9 March for shares in HSBC Holdings.

In a statement the SFC said the investigation decision was made "given the significant public interest."

The SFC's investigation will include whether the closing price of HSBC on 9 March 2009 was the result of any manipulation contrary to it's Ordinance or whether any licensed person has breached the it's Code of Conduct in distorting the market for or the price of HSBC shares.

In a 10-minute closing auction session for its USD17.7bn rights issue, the price of HSBC's Hong Kong listed shares dropped sharply by 24%, negatively affecting the benchmark Hang Seng Index.

The drop caused Sandy Flockhart, chief executive of HSBC Asia Pacific, to call a press conference the following day, where he explained the fluctuation as being caused by "technical trading".

Designed to ensure confidence in the brand, Flockhart said the collapse was caused by a handful of small volume trades which destabilised the share price and that it had predicted some choppy trading after the rights issue was announced.

The share price bounced on Tuesday and Wednesday, but some market analysts and investors complained that the deal had been used by some hedge funds and institutional investors as an instrument to manipulate prices.

The Asian edition of the Wall Street Journal reported than Asian hedge fund Harbinger Capital Partners had disclosed a short position of HSBC representing 0.26% of its London listed shares on Wednesday.

Analysts are predicting Hong Kong Exchanges & Clearing may now accelerate the implementation of a 2% cap on stock fluctuations during so-called closing auction sessions.