All About HSBC... Such a stock @ Such a time

Monday’s late collapse in HSBC’s Hong Kong shares was just what frazzled nerves didn’t need. Lumbering mega-caps like this – known locally as the Big Elephant – aren’t supposed to flit like a micro-cap.

Regulators are now investigating, doubtless relieved that no real harm was done. By mid-morning on Tuesday the second-biggest stock in the Hang Seng index was back up to where it had traded before Monday’s closing auction, during which it fell from HK$37 to HK$33. The usual suspects – a fat-fingered trader, a hedge fund facing a sudden margin call – are in the frame, even though the plunge could have been triggered by a honest sell order. The announcement last week of Britain’s biggest ever rights issue, along with a chopped dividend, was confirmation that the bank fears its US bondholders more than it loves its shareholders. The slump briefly brought HSBC’s forward price/earnings ratio in line with the global average.

The most plausible explanation, however, is traders gaming the system. The Hong Kong exchange is not alone in running a ten-minute auction every afternoon to settle outstanding trades: almost every other major market does this too, to calculate a price that will satisfy as many orders as possible. But unlike others, Hong Kong has no system of random closing: the auction ends every day on the stroke of 4:08. That means that market participants have an incentive to time their bids. In this case, the downswing in HSBC caused by an order seconds before the deadline knocked about 212 points off the HSI. An issuer of index options callable that day might have been willing to wear a big loss on the shares.

Hong Kong’s auction regime is less than a year old, so can be excused a few teething-problems: London ran into plenty of difficulties nine years ago. Proposed tweaks from the HKEx may limit the damage, but do nothing to resolve that basic flaw. The market, and its traumatised retail shareholders, deserve better.