Shanghai Bourse Targets Manipulation With Tweak to Closing Price

The Shanghai Stock Exchange is planning to change the way it calculates the closing price of shares in a battle against stock manipulation.

The exchange is considering introducing a call auction in the last three minutes of daily trading, which ends at 3 p.m., to generate the closing price of shares, it said in draft rules to revamp the existing mechanism. In a call auction, the bourse’s system collects bids by sellers and buyers during a predetermined period of time, and then spits out a single price based on the match with the highest volume.

Currently, the Shanghai stock exchange calculates the closing price using a type of weighted average price of all transactions during continuous trading in the minute before the final trade.

The rejiggering of the closing price, an important benchmark for investors, aims to prevent traders from manipulating the price of certain stocks in the last minutes of trading for their own ends. Small caps are particularly vulnerable because they don’t trade in volumes anywhere near those of big-name blue chips, allowing traders with deep enough pockets to run up the price at the end of the trading day. “Manipulating the closing price is mainly intended to ... attract retail investors to follow to buy so that (the manipulators) can sell the stocks (at high prices) and take a profit,” a trader, who refused to be named, told Caixin.

Authorities are concerned that the problem will grow as the number of small-cap stocks on the Shanghai bourse increases. “With the rapid development of China’s securities market in recent years, there is a growing need for the closing price to be resistant to manipulation. ... International experience has proved that a closing call auction can prevent the risk of abnormal transactions to some extent and reduce price volatility during the settling period at the close,” the Shanghai exchange said in its draft rules.

An increasing number of small-cap stocks have been floated in Shanghai in recent years. Based on Friday’s closing prices, 187 of the 348 stocks listed in Shanghai since 2016, or 53.7%, have a market cap under 5 billion yuan ($778.8 million). By contrast, among the entire 1,458 companies listed on the Shanghai bourse, 37.4% have a market cap under 5 billion yuan, according to Chinese data provider Wind.

A call auction is already being used to determine opening share prices in Shanghai and both the opening and closing prices on the Shenzhen Stock Exchange.

Authorities have stepped up efforts to rein in price manipulation in the market in recent years. In April, the Shanghai Stock Exchange suspended the account of an investor named Cao Liming for three months for illicitly pumping up the closing price of several stocks from April 2017 to January.

In the same month, the Shanghai and Shenzhen bourses proposed tightening disclosure requirements on shareholdings in listed companies to prevent investors from secretly building up stakes, creating a false market in the stock and hurting the interests of small shareholders.

In one of the most severe civil punishments it has meted out to an individual, China’s securities regulator last year fined Xian Yan, a lawyer turned investor, more than 3.48 billion yuan and barred him for life from the securities industry for violating information-disclosure rules and manipulating stock prices.

Contact reporter Fran Wang (fangwang@caixin.com)