To allay concerns of market manipulation during the new closing-auction format, the Hong Kong Stock Exchange is considering alternatives to the 10-minute session.

HKEx Chief Operating Officer Gerald Griener said yesterday that the auction format will be thoroughly reviewed, given the market's erratic movement during the 10-minute bidding session on May 30.

The announcement was made during a special meeting of the Legislative Council's Financial Affairs Panel to discuss the abnormal trading pattern.

"We will indeed look at that possibility closely," Griener said of establishing a random closing time.

It was the first time that the stock market operator has softened its stance on random closings - a practice that bourses in London, Frankfurt and Australia have adopted.

The exchange has stood firm in its belief that the fixed-time system is an easier model for the market to understand, because the same mechanism is already in place for the pre-opening auction.

Activist shareholder David Webb has said that a random closing will make it even more expensive for investors to attempt to manipulate stock prices, thereby limiting the risk.

The new auction session has attracted widespread concern after numerous stocks climbed and fell more than 10 percent on May 30. But Griender maintains that the severe volatility was due to the rebalancing of passive funds tracking MSCI indices.

Legislator Chim Pui-Chung, who represents the brokerage sector, was unimpressed by that explanation. He said that trading with the purpose of rebalancing fund portfolios is in itself a kind of manipulation.

"It is a naked fact that the abnormal trading on May 30 was due to market manipulation," he said.

"I don't understand why the regulators are still hesitant to call it what it was."

Securities and Futures Commission (SFC) Executive Director Keith Lui said that investigations relating to possible malpractice are still ongoing, so it's too early to draw any conclusions.

"There are very clear legal guidelines when it comes to defining market manipulation," Lui said, adding that punishments will be given if it is determined that manipulation indeed occurred.

The government's Financial Services and the Treasury Bureau is also very concerned, according to Alice Cheung, the principal assistant secretary for the bureau.

"We urge both organizations to find a solution to ensure the stability and smooth operation of this new system," she said.

The closing-auction format began on May 16. It extends the trading day by 10 minutes, to 4:10 pm, giving investors a chance to determine a stock's final closing price - adjusted based on its activity during the auction.

Both the SFC and HKEx said yesterday that they are currently reviewing market recommendations about refining the closing auction, but no timetable for a final report was given.

(HK Edition 06/11/2008 page2)