Stocks returned to normal yesterday after heavily fluctuating during Friday's closing auction session, and the city's bourse operator said it won't shelve the mechanism despite the troubles.

Friday's 10-minute closing session following the market's 4 pm close saw several stocks heavily traded.

And the fluctuations continued yesterday, but they were more in line with balancing out the Friday changes.

Shares of CLP Holdings, which rose 9.8 percent on Friday, fell 8.2 percent yesterday to close at HK$64.70. And stocks such as C C Land Holdings saw the worst of the rollercoaster ride, soaring 21 percent Friday before plummeting 16.5 percent yesterday.

Both stocks had their weighting increased in the MSCI after Friday's close.

Deleted from the MSCI family, Hunan Nonferrous Metals plunged 10.6 percent on Friday. The stock pared earlier-day losses to close at HK$2.83, rising 8.4 percent yesterday. Another example was TPV Technology, which jumped 9.8 percent yesterday after its 11.1 percent Friday plunge.

Some retail investors blamed their losses on the closing auction mechanism.

Paul Chow, chief executive of the Hong Kong Exchanges and Clearing (HKEx), said that the heavy trade on Friday was due to the MSCI rebalancing, resulting in "at least HK$30 billion worth of fund flow from passive funds tracking the relevant MSCI indices".

He said 167 stocks were affected by the rebalancing, but just 21 of those changed more than 5 percent.

The transaction volume with the 10-minute closing auction session reached about HK$14 billion - 95 percent of which came from the 167 stocks, according to the HKEx.

Market watchers argued that the closing auction session allows for easier market manipulation.

Chow said the HKEx will not shelve the new mechanism, noting that there are no mechanisms that are guaranteed to prevent market manipulation. The costs and risks for potential manipulators are much higher under the mechanism.

He noted that both big and small brokerages placed orders for their customers.

Castor Pang, a strategist at Sung Hung Kai Financial, agreed that there is no perfect mechanism. "Actually, the costs for manipulation are higher as the investors need to pour in money for bidding," he said.

Under the new mechanism, the price with the highest number of bids on a stock during the closing auction session becomes the closing price, while the old system picked the mid-price of the last five orders made before the market ended.

Former HKEx Non-Executive Director David Webb suggested introducing a random closing time for the auction of each stock, such as picking a price between 4:04 pm and 4:08 pm.

However, Pang said that may not be able to eliminate the manipulation problem, as investors can also place orders within the chosen period.

Chow said he doesn't expect Friday's high fluctuations to be repeated on this Friday's Hang Seng Index rebalancing. He said the related-fund flow should be about HK$2 billion.

(HK Edition 06/03/2008 page2)