Abstract
On 25 March 2002, the Hong Kong Exchanges and Clearing Ltd (HKEx) introduced an opening call auction. This trading mechanism is designed to facilitate price discovery in the presence of asymmetric information at the market open, increasing opening price efficiency. The design of the HKEx differs significantly from opening auctions in other markets. Contrary to previous research, the results indicate a decrease in market quality following the introduction of the opening call auction. This decline is largest in the less actively traded stocks.
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Notes
e.g., the London Stock Exchange, Deutsche Borse AG, Euronext, Tokyo Stock Exchange, Singapore Exchange, Korea Exchange, Taiwan Stock Exchange, New York Stock Exchange, Toronto Stock Exchange and the NASDAQ.
The authors acknowledge an anonymous referee for this suggestion.
The HKEx encourages companies to release news prior to the open.
The period from 12:30–14:30 is called the extended morning session. At the time of writing, this session trades only two securities in a continuous auction.
Two additional limit order types are available, an enhanced limit order and a special limit order. See the HKEx website for further explanation of these order types. www.hkex.com.hk
Orders must consist of a board lot or multiples of a board lot (but less than 600 board lots) to be matched in the continuous trading session. Orders that do not conform to these size restrictions are called odd lots. Odd lot orders are not automatically matched in price then time priority in AMS/3. They are executed manually at the conclusion of the trading session.
The IAP is an indication of the call auction price if the auction was held at that instant. The IEV indicates the volume of shares that will execute at the IAP.
At-auction orders (identical to market-on-open orders) do not specify a price. At-auction limit orders (identical to normal limit orders) specify a limit price and execute at this limit price or better. The matching algorithm rules determine which orders execute in the call auction and at what price.
If at the end of the order input period the best bid order in the limit order book is at a price lower than the best ask, no call auction is possible. In this case all at-auction orders are cancelled and the stock opens for continuous trading at 10:00. If trade in the call auction is possible, the matching algorithm selects the single auction price which maximizes trading volume. If more than one price exhibits maximum trade volume, the call auction price is the price where order imbalances are minimized. If more than one price minimizes order imbalances, the call auction price is the price that is closest to the previous closing price. At-auction orders have priority over at-auction limit orders.
Several trading days during the sample period are omitted from the calculations. No trade information is available in the Reuters database on 18 and 28 January 2002. In addition, 11 February 2002 is excluded as there is no afternoon trading session on this day. Seven other days were excluded due to public holidays, 12–14 February 2002, 29 March 2002, 1 and 5 April 2002 and 20 May 2002.
The turnover test requires that a stock must have no more than 20 non-trading days over the past 12 months. The market size rule stipulates that companies that increase their rank to 160th or above will be included in the index. Companies falling to 240th or below will be removed from the index.
The HSCI commenced in October 2001. Therefore there are less than 240 observations prior to the event-date. The HSCI is replaced by the Hang Seng Index (HSI). This index accounts for around 70% of total market capitalization and is highly correlated with the HSCI.
Relative daily values are also calculated. These results are consistent and are not reported.
This result also holds when variance rations are calculated using open-to-open and open-to-lunch returns, and open-to-open and open-to-after lunch returns.
Opening price volatility is also examined over the full post-event period, i.e., no partitioning between call and no call auction days. Consistent with the variance ratio results, this result indicates that opening price volatility is significantly higher post-event.
The significance of the difference between the pre- and post-event results is measured with a t statistic and a Wilcoxon Z score. These tests are consistent. Therefore only the t statistics are presented in Table 7.
This result is consistent across quartiles. Therefore the results by quartile are not presented.
Absolute spreads are also examined across eight, 30 min intervals over the pre- and post-event period. The results indicate no significant change in spreads between the pre- and post-event period. The results between news and no-news days are consistent. Therefore absolute spreads are not reported.
Discussions with an institutional broker in Hong Kong indicates that manual order inputting during the pre-open is a significant disincentive for using the call auction.
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Acknowledgments
The authors thank two anonymous referees for helpful comments and suggestions. The authors thank the Australian Stock Exchange, Securities Industry Research Centre of Asia-Pacific (SIRCA) and the Australian Research Council (ARC Linkage Project LP0455536) for funding. The authors also thank the SIRCA and Reuters for providing access to the data used in this study.
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Comerton-Forde, C., Rydge, J. & Burridge, H. Not all call auctions are created equal: evidence from Hong Kong. Rev Quant Finan Acc 29, 395–413 (2007). https://doi.org/10.1007/s11156-007-0036-9
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DOI: https://doi.org/10.1007/s11156-007-0036-9