HONG KONG: Suspicious trading that sent shares of HSBC crashing earlier this week will spell the end to the closing auction at the Hong Kong Stock Exchange.

The city's bourse operator, Hong Kong Exchanges and Clearing (HKEx), says the auction will end March 23.

The glaring deficiency of the closing auction seized the limelight Monday as a last minute "sell order" sent the price of HSBC stocks plummeting to HK$33 a share. The sharp nosedive in HSBC shares stunned the market.

HKEx introduced the closing auction May 26, 2008. The intent was that the auction would be held for 10 mins after the day's continuous trading session ended. Investors could auction "limit orders" on equities.

The mechanism aroused criticism in the market. Detractors said speculators used the auction to manipulate share prices.

They say shady manipulations by speculators were underlying factors in abnormal price movements of Sinotrans, CLP Holdings and China Insurance International Holdings during the auction.

HKEx tried to address the criticisms by releasing a consultation paper last December. The paper suggested a restriction on limit orders to a range no more than 2 percent above or below the share price at the close of the regular session.

The HSBC incident appears to have persuaded the MKEx that the auction creates a loophole for unscrupulous practices.

Sandy Flockhart, Chief Executive Officer of HSBC Asia Pacific, earlier said that he didn't rule out the possibility some market makers and hedge funds pushed down the price to purchase the rights issue at a lower price.

HKEx held a meeting yesterday at which board members agreed to abandon the closing auction, effective March 23.

Share trading will resume under the previous system. The trading session will cease at 1600.

After the meeting, HKEx Chief Executive Paul Chow stressed that the bourse made the amendment in consideration of the volatility of the stock market, rather than price fluctuations of one or two specific stocks. The bourse abandoned its earlier 2-percent-range proposal.

"I believe the financial market will remain volatile over the coming weeks with the imminent large fundraising activities," Chow said. "The bourse will continue to observe the market situation to beef up the system."

Chinese University of Hong Kong Associate Professor Terence Chong said cessation of the closing auction is a sound decision." The system can't provide a fair trading platform to retail investors. They are being kept in the dark when speculators manipulate the share prices."

(HK Edition 03/13/2009 page16)