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Cash Market Pre-opening Session &

Index Basket Order Trading Mechanism

February 2002

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Agenda

I. Pre-opening Session

• Purposes & Benefits

• Main Features

• Trading Operations

• Contingency Arrangement

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Agenda ……Cont’d

II. Index Basket Order Trading Mechanism

• Purposes & Benefits

• Main Features

• Criteria for Index Basket Order

III. Market Rehearsal and Implementation

IV. Q & A Session

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PRE-OPENING SESSION

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Purposes & Benefits

• Allow Exchange Participants to start order input during the Pre-

opening Session and improve their operational efficiency

• Reduce the loading of the system arising from the large number of

order inputs and trade execution messages at the commencement of

morning session

• Prevent significant price fluctuations and possible manipulation at

the commencement of Continuous Trading Session

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Purposes & Benefits ……Cont’d

• Establish an optimized opening price

• Maximize the quantity of order matching

• Allow Exchange Participants to report pre-open trades

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Main Features

• Trading Mechanism:

– Order matching by Single Price Auction only (no market making and continuous

automatching)

– Reporting of pre-open trades

• 2 new order types

– At-auction Order

– At-auction Limit Order

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Main Features …...Cont’d

• Pre-opening Session will apply to all markets, all securities

and all trading facilities from 9:30 a.m. to 10:00 a.m.

• It comprises four different periods as follows:

– Order Input Period 9:30 a.m. to 9:45 a.m.

– Pre-order Matching Period 9:45 a.m. to 9:50 a.m.

– Order Matching Period 9:50 a.m. to 9:58 a.m.

– Blocking Period 9:58 a.m. to 10:00 a.m.

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Main Features …...Cont’d

Order Input Period (9:30 a.m. to 9:45 a.m.)• Input of at-auction orders (without a specified price) and at-auction

limit orders (with a specified price) only

• Orders may be modified or cancelled

• Both Indicative Equilibrium Price (IEP) and Indicative Equilibrium

Volume (IEV) will be calculated and displayed continually

• IEP is the price at which the maximum number of shares can be

traded if matching occurs at that time

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Order Input Period (9:30 a.m. to 9:45 a.m.) …...Cont’d

• IEV is the number of shares that would be traded at the IEP

• The nominal price equals to IEP (if available) or the

previous closing price (if IEP is not available)

• Orders subject to the same validation as Continuous

Trading Session, except 8-spread quotation rule is waived

• Short selling orders not accepted

• Input of pre-open trades allowed

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Main Features …...Cont’d

Pre-order Matching Period (9:45 a.m. to 9:50 a.m.)• Same as Order Input Period except:

– input of at-auction order only– all orders cannot be modified or cancelled

• Avoid significant change in the IEP by removing orders just before the commencement of the Order Matching Period

• Provide a mechanism to adjust the IEP to a fair market price while attracting more order (i.e. at-auction orders) in this period

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Main Features …...Cont’d

Order Matching Period (9:50 a.m. to 9:58 a.m.)

• no input, modification and cancellation of orders

• orders will be matched in order type (at-auction order first),

price and time priority at the final IEP in this period

• details of concluded trades will be disseminated to relevant

Exchange Participants and the aggregate total will be

disseminated as one single trade with trade type “U” to the

market immediately

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Order Matching Period (9:50 a.m. to 9:58 a.m.) …...Cont’d

• cancellation of at-auction orders and conversion of at-

auction limit orders to limit orders which will be carried

forward to Continuous Trading Session

• no input of pre-open trades

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Main Features …...Cont’d

Blocking Period (9:58 a.m. to 10:00 a.m.)

• a break between the Pre-opening Session and the Continuous Trading S

ession

• no input / modification / cancellation of orders and pre-open trades

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Trading Operations (1) Input operations of new order types At-auction Orders

• Input of at-auction orders is permitted during Order Input Period and Pre-order Matching Period but Modification / Cancellation of at-auction orders is only permitted during Order Input Period

• At-auction orders enjoy a higher auction matching priority than at-auction limit orders

• Unfilled at-auction orders will be cancelled automatically

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At-auction Orders …...Cont’d

• Press PRE/SP + BUY ORD or SELL ORD (same as Enhanced Limit Order and Special Limit Order)

• Enter the order details (e.g. stock code, quantity,etc)

• Order type : At-auction Order = “A”

• No order price is associated with at-auction orders, i.e. at-auction orders will be matched at the final IEP

PRE/SP BUY ORD STOCK 1 PRICE 0.000 QTY 2,000CHEUNG KONG MAIN BROKER TYPE A AON? N REF SS? N TC長江實業

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(1) Input operations of new order types …...Cont’d

At-auction Limit Orders

• At-auction limit order is a buy order or sell order with a specified price

• Input, modification and cancellation of at-auction limit orders are only permitted during Order Input Period

• Unfilled at-auction limit orders, with input price not deviating 9 times or more from the prevailing nominal price, will be converted to limit orders at the input price and carried forward to the Continuous Trading Session of the same day

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At-auction Limit Orders …...Cont’d

• Press PRE/SP + BUY ORD or SELL ORD (same as Enhanced Limit Order and Special Limit Order)

• Enter the order details (e.g. stock code, price, quantity,etc)

• Order type : At-auction Limit Order = “I”

PRE/SP BUY ORD STOCK 1 PRICE 71.75 QTY 2,000CHEUNG KONG MAIN BROKER TYPE I AON? N REF SS? N TC長江實業

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(2) Display of information

At-auction order/at-auction limit order

• at-auction orders and at-auction limit orders with prices at or better

than IEP will be grouped under the IEP queue

• at-auction orders will not be displayed if there is no IEP

IEP / IEV

• calculated and displayed throughout the Order Input Period and the

Pre-order Matching Period

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(2) Display of information …...Cont’d

MARKET STOCK 1234 PRICE QTY ADE Land Co MAIN BROKER LEFT/RIGHT Security Enquiry 1234 ADE Land Co H S# | BID ( 36.00 ) ASK ( 36.00 ) MAIN |0660 (At-auction order)|3160 ($35.75)HIGH |1230 ($36.00) |2690 ($36.00)LOW | -1s | +1sPRV CLOSE 37.00 |2460 ($35.75) |3450 ($36.25)NOMINAL 36.00 | |5610 ($36.25)P/E RATIO IEP 36.00 IEV 80| |SHARES TR BID ASK | |TURNOVER 36.00 36.00 | |SPREAD 0.25 /0.25 SHRS(ORD) SHRS(ORD)| |LOT SIZE 10 260( 2) 80( 2)| | 20( 1) 40( 2)| |CURRENCY HKD( ) ( ) ( )| |H# ( ) ( )| | ( ) ( )| |Order Input | | | |

Market state

Order type and order price will not be displayed

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(3) Examples of Pre-opening SessionExample 1

Order Input

The table below shows all orders in the order book at the commencement

of Order Matching Period, sorted in the sequence of matching priority

BID ASKBroker Time Volume Price Price Volume Time Broker

A 09:35 2,000 At-auction 31.90 2,000 09:31 PB 09:30 1,000 32.00 31.90 8,000 09:40 QC 09:41 8,000 32.00 32.00 10,000 09:35 MD 09:32 6,000 31.90 32.00 4,000 09:43 NE 09:40 3,000 31.90 32.00 2,000 09:44 OF 09:44 2,000 31.90 32.10 6,000 09:42 KG 09:43 2,000 31.80 32.10 2,000 09:43 L

32.20 4,000 09:31 H32.20 2,000 09:38 I32.20 1,000 09:42 J

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Example 1 ……Cont’dDetermination of IEP

In general, the IEP shall be one of the bid prices or ask prices which falls at or within the range of the Highest Bid Price and the

Lowest Ask Price and results in maximum matched shares

Therefore, the IEP is determined to be $32.00

Possible IEP Acc. Bid Qty Acc. Ask Qty Matched Shares32.00 11,000 26,000 11,00031.90 22,000 10,000 10,000

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Example 1 ……Cont’d

Order Matching

The following trades are generated:

Buying Broker Trades Generated Selling BrokerA 2,000@32.00 PB 1,000@32.00 QC 7,000@32.00 QC 1,000@32.00 M

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Example 1 ……Cont’d

Orders Carried Forward to Continuous Trading Session

The following unfilled at-auction limit orders would be

carried forward to the Continuous Trading Session:

BID ASKBroker Time Volume Price Price Volume Time Broker

D 09:32 6,000 31.90 32.00 9,000 09:35 ME 09:40 3,000 31.90 32.00 4,000 09:43 NF 09:44 2,000 31.90 32.00 2,000 09:44 OG 09:43 2,000 31.80 32.10 6,000 09:42 K

32.10 2,000 09:43 L32.20 4,000 09:31 H32.20 2,000 09:38 I32.20 1,000 09:42 J

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Example 2

During Order Input Period (9:30 - 9:45 am)

Assuming that the following orders are entered during the Order Input Period:

Bid AskBroker Time Volume Price Broker Time Volume Price

A 09:36 1,000 64.25 D 09:39 2,000 63.75B 09:32 5,000 64 E 09:38 3,000 64C 09:42 2,000 63.75 F 09:33 2,000 64.25

G 09:40 2,000 64.25

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Example 2 ……Cont’d

The IEP is calculated to be $64 and the cumulative available quantities at the bid and ask sides at $64 are 6,000 and 5,000 shares respectively.

Possible IEP Acc. Bid Qty Acc. Ask Qty Matched Shares64.25 1,000 9,000 1,000

64 6,000 5,000 5,00063.75 8,000 2,000 2,000

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Example 2 ……Cont’d

During Pre-order Matching Period (9:45 - 9:50 am)

A broker, who wants to match the surplus at IEP or is of the view that the IEP is on the high side can enter an ask at-auction order of 1,000 shares or more.

Assuming Broker H enters an ask at-auction order of 5,000 shares during the Pre-order Matching Period and the order book is as follow:

Bid AskBroker Time Volume Price Broker Time Volume Price

A 09:36 1,000 64.25 H 09:46 5,000 at-auctionorder

B 09:32 5,000 64 D 09:39 2,000 63.75C 09:42 2,000 63.75 E 09:38 3,000 64

F 09:33 2,000 64.25G 09:40 2,000 64.25

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Example 2 ……Cont’d

The IEP is now changed from $64 to $63.75 but the number of tradable shares is increased from 5,000 to 7,000.

Possible IEP Acc. Bid Qty Acc. Ask Qty Matched Shares64.25 1,000 14,000 1,000

64 6,000 10,000 6,00063.75 8,000 7,000 7,000

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Example 2 ……Cont’d

If another broker I is of the view that the IEP is low and enters a bid at-auction order of 10,000 shares. The order book is as follow:

Bid AskBroker Time Volume Price Broker Time Volume Price

I 09:48 10,000 at auctionorder

H 09:46 5,000 at-auctionorder

A 09:36 1,000 64.25 D 09:39 2,000 63.75B 09:32 5,000 64 E 09:38 3,000 64C 09:42 2,000 63.75 F 09:33 2,000 64.25

G 09:40 2,000 64.25

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Example 2 ……Cont’d

The IEP is changed from $63.75 to $64.25 and the number of tradable shares is further increased to 11,000.

Since only at-auction order can be entered and no modification or cancellation of orders is allowed during the Pre-order Matching Period, it can avoid significant change in the IEP.

Possible IEP Acc. Bid Qty Acc. Ask Qty Matched Shares64.25 11,000 14,000 11,000

64 16,000 10,000 10,00063.75 18,000 7,000 7,000

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CONTINGENCY ARRANGEMENT

Typhoon and Rainstorm

• If Typhoon Signal No. 8 or above hoisted or Black Rainstor

m Warning issued and not lowered/discontinued at or befo

re 7:30 a.m., no Pre-opening Session will be commenced for

that day

• The time for commencement of Continuous Trading Sessio

n (if any) will follow the current practice

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Typhoon and Rainstorm ......Cont‘d

• If Typhoon Signal No. 8 or above hoisted during the Pre-opening Session, the Pre-opening Session will continue until it ends. There will be no Morning Session and Extended Morning Session

• The commencement of the Afternoon Session will follow the current practice

• If Black Rainstorm Warning issued during the Pre-opening Session, trading will continue

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CONTINGENCY ARRANGEMENT …...Cont’d

Emergency - Market Close

• If market closes (eg. due to system failure) during the Order In

put Period or the Pre-order Matching Period, all at-auction and

at-auction limit orders will be cancelled. Trading will resume w

ith the Continuous Trading Session directly on the same day.

• If market closes during the Order Matching Period and trading

can be resumed on the same day, the Order Matching Period wi

ll continue at the time of restart.

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Index Basket Order Trading Mechanism

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Purposes & Benefits

• Provide an additional order data packet design to contain a

basket of orders in one single order message

• Facilitate execution of multiple orders for index basket

trading, including index arbitrage

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Main Features

• Index Basket Order can only be input to the trading system through Broker Supplied System (BSS) during the Continuous Trading Session

• Only apply to the constituent stocks of Hang Seng Index (HSI) at initial stage (may consider to cover other tradable indices later)

• Each Index Basket Order will be submitted to the system at a rate of one basket order per second (same as current throttle rate for single order)

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Main Features …...Cont’d

• Upon submission to AMS/3 host, the basket order will be split into normal special limit order which have the following features:– matching priority in time sequence only;

– orders will not be rejected due to price changes during a fast market;

– unfilled orders will be cancelled immediately; and

– brokers do not need to manage a large number of orders requiring price modification or cancellation in the case of sudden changes in market conditions.

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Criteria for Index Basket Order• Each basket order shall meet the following criteria:

– Each basket order must only comprise special limit order– Each basket order must contain at least 18 constituent stocks of the HSI– Each basket order has to track at least 90% of the market capitalisation

of the HSI– The weighting of each stock in a basket order must not deviate from its

index weighting by more than 20%– Each basket order must be one-sided (i.e either buy orders or sell orders)

• Non-compliance with any of the aforesaid criteria may result in suspension of input of Index Basket Order

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Criteria for Index Basket Order …...Cont’d

An Illustration Weighting in Index Basket OrderRanking

StockCode Stock Name

Weightingin HSI (%) Max (%) Min (%)

(i.e. deviation <= 20%)

1 5 HSBC Hldgs 27.34 32.81 21.88

2 941 China Mobile 14.45 17.34 11.56

3 13 Hutchison 9.77 11.72 7.81

4 1 Cheung Kong 5.66 6.79 4.53

5 11 Hang Seng Bank 5.65 6.78 4.52

6 16 SHK Prop 5.12 6.14 4.09

7 762 China Unicom 3.21 3.86 2.57

8 2 CLP Hldgs 2.51 3.01 2.01

9 883 CNOOC 2.34 2.81 1.87

10 6 HK Electric 2.11 2.53 1.69

11 12 Henderson Land 2.01 2.42 1.61

12 3 HK & China Gas 1.86 2.23 1.49

13 66 MTR Corporation 1.81 2.18 1.45

14 8 PCCW 1.47 1.77 1.18

15 4 Wharf (Hldgs) 1.45 1.74 1.16

16 19 Swire Pacific 'A' 1.34 1.61 1.07

17 293 Cathay Pac Air 1.29 1.55 1.03

18 267 CITIC Pacific 1.16 1.39 0.93

Sub-total 90.56

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Market Rehearsal and Implementation

• 2 market rehearsals will be conducted in March 2002

• Subject to the results, the Pre-opening Session and Index

Basket Order Trading Mechanism will be implemented as

soon as the market is ready

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Q &A Session

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ALGORITHM OF IEP CALCULATION

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IEP Calculation

IEP presents whenever:

Highest Bid Price of At-auction Limit Orders > Lowest Ask Price of At-auction Limit Orders

With IEP Without IEP

Bid Ask Bid AskPrice Volume Price Volume Price Volume Price Volume

at-auction 500 at auction 1,000 at-auction

1,000 atauction

1,500

$205 2,000 $201 1,000 $203 1,000 $205 1,000$203 1,000 $203 500 $202 1,000$202 500 $205 1,000 $201 500

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IEP Calculation …...Cont’d

Rule 1 - IEP must be a price at or between Highest Limit Bid and Lowest Limit Ask

The IEP must be one of the bid prices or ask prices which falls at or within the range of the Highest Bid Price and the Lowest Ask Price, i.e. $205, $203, $202 and $201.

* Go to Rule 2 if more than 1 price fulfil Rule 1

Order Book

Bid AskPrice Volume Price Volume

at-auction 500 at auction 1,000$205 2,000 $201 1,000$203 1,000 $203 500$202 500 $205 1,000

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IEP Calculation …...Cont’d

Rule 2 - Pick the Price with Maximized Matched Shares

The IEP will be either $203 or $205 in which the quantity of matched shares is maximized:

Price Matched Shares• $201 - 2,000 shares• $202 - 2,000 shares• $203 - 2,500 shares• $205 - 2,500 shares

* Go to Rule 3 if more than 1 price fulfil Rule 2

Order Book

Bid AskPrice Volume Price Volume

at-auction 500 at auction 1,000$205 2,000 $201 1,000$203 1,000 $203 500$202 500 $205 1,000

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IEP Calculation …...Cont’dRule 3 - Pick the Price with Lowest Normal Order Imbalance

The IEP will be either $203 or $205 in which the normal order imbalance is the lowest:

* If more than 1 price fulfil Rule 3: - Go to Rule 4 when there is previous closing price; or - Go to Rule 6 when there is no previous closing price.

Order Book

Bid AskPrice Volume Price Volume

at-auction 500 at auction 1,000$205 2,000 $201 1,000$203 1,000 $203 500$202 500 $205 1,000

Possible IEP Acc. Bid Qty Acc. Ask Qty Matched Qty Imbalance$203 3,500 2,500 2,500 1,000$205 2,500 3,500 2,500 1,000

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IEP Calculation …...Cont’d

Rule 4 - Pick the Price which is closest to the previous closing price

Suppose the Previous Closing Price is $204.

$203 and $205 are of equadistant from the previous closing price

* Go to Rule 5 if more than 1 price fulfil Rule 4.

Order Book

Bid AskPrice Volume Price Volume

at-auction 500 at auction 1,000$205 2,000 $201 1,000$203 1,000 $203 500$202 500 $205 1,000

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IEP Calculation …...Cont’d

Rule 5 - Pick the Higher Price

Select the higher price. The IEP will be $205.

* IEP can be calculated up to this rule with previous closing price.

Order Book

Bid AskPrice Volume Price Volume

at-auction 500 at auction 1,000$205 2,000 $201 1,000$203 1,000 $203 500$202 500 $205 1,000

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IEP Calculation …...Cont’d

Rule 6 - Pick the Highest Price (only applicable if no previous closing price)

Select the highest price. The IEP will be $205.

* Consider this rule only when there is no previous closing price and more than 1 price fulfil Rule 3.

Order Book

Bid AskPrice Volume Price Volume

at-auction 500 at auction 1,000$205 2,000 $201 1,000$203 1,000 $203 500$202 500 $205 1,000