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The Shenzhen Stock Exchange (SZSE) recently released the Circular on Issues Concerning Temporary Trading Halt of IPO Shares on the First Trading Day (the “Circular”). In an interview with reporters, a senior officer of the SZSE answered questions regarding market concerns.
Q: Please brief on the background of the Circular
A: On 30 November, the China Securities Regulatory Commission (the “CSRC”) issued the Opinions on Further Advancing the Reform of IPO System (the “Opinions”), which require stock exchanges “to improve the opening price formation mechanism for IPO shares on their first trading day and the trading mechanisms for IPO shares at the initial stage of their listing, establish a trading halt system for first trading day benchmarked to the issue price, and tighten control of speculation on IPO shares.” To implement the CSRC’s requirements and in response to IPO reform, we amended the trading mechanisms for IPO shares on their first trading day accordingly and released the Circular.
Over-speculation over IPO shares at the initial stage of listing will not only affect the reasonable pricing of IPO shares, but also brings hidden troubles to the movement of IPO shares after listing. A large amount of our empirical data indicates that small- and mid-cap investors are the most vulnerable among IPO share speculators. They had a gambling mind when snapping up IPO shares only to find themselves outsmarted. For example, by far, 56.2% of accounts with purchase of IPO shares on the first trading day in 2012 have proven to be in losses, with an average loss of RMB 5900 per account, or an average loss rate of 10% per account.
The Circular, which adjusted and improved the opening price formation mechanism for IPO shares on their first trading day, is mainly designed to prevent excessive price advances of IPO shares upon market opening on their first trading day, stem over-speculation and facilitate the balanced, coordinated and sound development of primary and secondary markets.
Q: As part of the efforts to optimize trading mechanisms for IPO shares on their first trading day, what are the main contents of the Circular?
A: In response to IPO reform, we have been exploring and reforming the trading mechanisms for IPO shares on their first trading day since 2005 and made some achievements. On this occasion, we further adjusted the opening price formation mechanism and temporary trading halt mechanism for IPO shares on their first trading day according to the requirements of the Opinions and taking into account the new situations and characteristics of IPO shares at the initial stage of their listing that arose following the IPO reform last year.
The main contents of the Circular include four parts:
1. The valid price range for the opening auction. The valid price range during the opening call auction for IPO shares on their first trading day is adjusted to 20% above or below the issue price. If no opening price is generated from the call auction, the first execution price during the continuous auction will be taken as the opening price.
2. The closing price formation mechanism. A closing call pricing period will run from 14:57 to 15:00 for IPO shares on their first trading day, i.e., a one-time centralized matching of buy and sell orders in the central order book whose quotation prices are set at the last traded price. During the closing call pricing period, investors can either place or cancel their orders.
The closing price of IPO shares on their first trading day is the execution price generated from the closing call pricing. In the absence of any trade during the closing call pricing period, the closing price is the trading volume-weighted average price of all the trades of such security during the one minute before the last trade (including the last trade) on that day.
3. Thresholds for temporary trading halt. The former two fluctuation marks of 10% and 20% still apply as triggers for trading halt on the first trading day of IPO shares. If price fluctuation during intraday trading reaches or exceeds 10% above or below the opening price for the first time, trading will be suspended for one hour; if price fluctuation during intraday trading reaches or exceeds 20% above or below the opening price for the first time, trading will be suspended till 14:57. During temporary suspension, investors can either place or cancel their orders.
4. Operational mechanism after trade resumption. Upon trade resumption, a call pricing will be conducted for all the accepted orders, i.e., a one-time centralized matching of buy and sell orders in the central order book whose quotation prices are set at the last traded price.
If the temporary trading halt extends beyond 14:57, trading will be resumed at 14:57 for call pricing, then the closing call pricing will be followed.
Q: What amendments are made to the former rules?
A: Compared with Sections 2.4.2, 3.3.1, 3.4.3, 4.2.3, 4.3.4 and 4.3.6 of SZSE Trading Rules (Revised in November 2013) (the “Trading Rules”), the Circular made amendments in the following four aspects:
1. Narrowing the valid price range for the opening call auction. Under the existing Trading Rules, the valid price range during the opening call auction on the first trading day of IPO shares is within 900% of the issue price. With an eye to avoiding sharp price fluctuations of IPO shares after market opening on their first trading day as well as consequential over-speculation, we changed the valid price range to 20% above or below the issue price.
2. The former turnover rate trigger was cancelled. In order to maximize trading continuity and minimize suspension frequency, the Circular scrapped the turnover rate as a trigger for trading halt.
3. The closing call auction is changed to closing call pricing. Under the existing Trading Rules, the closing call auction for IPO shares runs from 14:57 to 15:00 on their first trading day and the valid price range is 10% above or below the last traded price. After the amendment, a closing call pricing is adopted between 14:57 to 15:00, i.e., a one-time centralized matching on the principles of time priority of buy and sell orders whose quotation prices are set at the last traded price before 14:57. If the trading halt extends to 14:57, the last traded price before 14:57 is the last traded price prior to the suspension.
It should be noted that during the closing call pricing period, centralized matching of orders is only limited to orders whose prices are set at the last traded price and that other orders will be regarded as invalid. For the convenience of investors, the Circular provides that orders can either be placed or cancelled during such period.
4. The call auction after trading resumption is changed to call pricing. Similar to the closing period, the Circular amended the existing call auction upon trading resumption after temporary trading halt of IPO shares on the their first trading day to call pricing, i.e., a one-time centralized matching on the principles of time priority of buy and sell orders accepted during trading suspension whose prices are set at the last traded price prior to the suspension. Any order placed during the suspension period whose price is other than the last traded price is not allowed to participate in the call pricing upon trading resumption.
It is important to note that the Circular applies only to the first day trading of IPO shares. The trading of securities that are not subject to the daily price limit, such as the first day trading of securities upon resumption of listing, is still governed by the existing Trading Rules.
In light of the significant amendments and changes in the Circular, we will also publish interpretive articles in our investor education column and we hope that investors pay close attention to and fully understand the Circular.
Q：What measures are in place to tighten control of IPO share speculation as required by the Circular?
A: We adhere to the principle of regulation by law, promote risk alert education, strengthen supervision of misconduct, closely monitor abnormal trading practices, crack down on suspected market manipulation and other malfeasances and guide investors for rational participation in trading of IPO shares. Firstly, we launched a special program called “Further Curbing First-day Speculation”. In June this year, we released the Guidelines on Risk Alerts by Members to Their Clients Regarding Securities with High Risk to help members sort out the accounts actively engaged in speculation of IPO shares and those operating in the red and establish differentiated management and risk alert mechanisms for IPO speculation accounts according to the different characteristics of clients. Secondly, we conducted investor education activities through multiple channels and forms. This year, through various forms such as “Open House Programmes” for Investors to make visits to securities firms, we urged members to intensify efforts in investor education on trading risk. We also launched an interactive column called “Prevention of Over-speculation of IPO Shares on First Trading Day” to allow investors to experience through simulated trading the risk of over-speculation of IPO shares. Thirdly, stepping up monitoring of trading in IPO shares and making self-regulatory measures more targeted. In response to abnormal trading behaviors in the initial stage of listing, we optimized monitoring indicators and enhanced the intelligent level of monitoring by developing a special module for monitoring abnormal trading of IPO shares, with our focus on monitoring the conduct of affecting share prices using the capital advantage.
