The Securities and Futures Commission (SFC) has received 60 complaints regarding potential market manipulation during the market closing auction on May 30.

SFC Chief Executive Officer Martin Wheatley noted that none of the complaints concerned losses due to the erratic share-price movements during the newly implemented 10-minute auction format.

"Almost all of them suggested that someone must be manipulating the market," Wheatley said of the complaints.

However, the regulator said that it has yet to determine whether any wrongdoing occurred. Still, it agreed that some "tweaks" should be made to the current system.

The SFC has yet to determine whether any wrongdoing occurred during the May 30 closing auction, but the regulator conceded that the new format needs work. AFP

Controversy surrounded the auction after passive funds tracking the MSCI indices rebalanced their portfolios on May 30. That unleashed a frenzy of activity during the 10-minute tendering session, resulting in extremely volatile stock prices.

Since then, market participants have called for the implementation of a random closing time, or the introduction of short-selling during the auction to minimize the possibility of market manipulation.

The SFC said that it is still too early to determine which policy fits the Hong Kong model, but it noted that the London market also experienced similar issues when it first adopted a closing-auction session.

That resulted in the London bourse restructuring its system, making it one of the most complex in the world, Wheatley said.

"The question is whether Hong Kong wants such a complex system," he said.

However, Wheatley does believe that short-selling could potentially stabilize the closing price.

"The auction process works best with different strategies," he said, attributing the erratic stock-price movement on May 30 to a lack of counter-trading needed to offset the rebalancing surge.

Tougher enforcement

Announcing its annual report yesterday, the SFC said it will be more focused on exercising its regulatory abilities.

And Wheatley said he expects more criminal proceedings to emerge this year as a result.

"The increase will reflect more focus on dealing with serious misconduct," he said.

In 2007, the regulator launched its first insider trading criminal proceedings and first jailed a market manipulator. Last year, the SFC started 205 investigations, completing 119. Of them, 31 percent concerned insider dealings.

Market manipulation, intermediary misconduct and corporate governance accounted for the remaining 69 percent.

Given the increase in the number of mainland firms listed in Hong Kong, SFC Chairman Eddy Fong said the plan is to work more closely with the the CSRC - the mainland's stock market regulator.

(HK Edition 06/12/2008 page2)