Call Auction Mechanism and Closing Price Manipulation: Evidence from the Hong Kong Stock Exchange

Abstract

The Hong Kong Stock Exchange (HKEx) adopted a closing call auction in 2008 but suspended its operation ten months later due to suspicion of widespread price manipulation. The Exchange relaunched the auction in 2016 with manipulation-deterrence enhancements. We exploit this unique setting by applying a triple-differences (DDD) methodology to examine the causal effect of call auction design on closing price manipulation. Our results indicate that a plain-vanilla call auction mechanism is prone to closing price manipulation. Under this mechanism overnight price reversal is more pronounced on days when derivatives expire and on days with large orders submitted just before the market close.