EGX to change its closing price mechanism
Major changes to the EGX coming this fall: The board of the EGX has approved a slew of changes meant to boost trading volumes, particularly by institutional investors. These include setting up a new mechanism for calculating the closing share price and easing limits on intraday price movements on shares, according to a statement (pdf). These changes are expected to come into effect next September, the bourse said.
Introducing the “pre-close auction”: Under the newly approved system, closing prices will be based first and foremost on an auction that takes place before market close, EGX boss Mohamed Farid told us last month. This “pre-close auction" will take place some time during the last 30 minutes before the end of trading, with the exact times to be determined by the EGX board next week, according the bourse statement. If the auction session results in a new closing price, traders will be able to buy and sell at that closing price for a few minutes before the end of the session (the “trade-at-close” period) .
…And the MVWAP: Should the auction fail to attract enough bids and generate a closing price, a 30-minute moving-volume weighted average (MVWAP) would be used.
How is this different from the current system? Under the current system, the EGX uses the volume weighted average price (VWAP), which uses all the trades that occur throughout a given session to determine a share’s closing price.
Why the change? The EGX aims to boost the trading volumes of institutional investors, who apparently prefer the MVWAP as it is used by some of the world’s biggest exchanges, Farid told us. Institutional investors based abroad prefer that exchanges allow post-auction trades, he noted.
The EGX has also given share prices more leeway to move before trading is suspended. Shares will be allowed to rise and fall by 20% during a single session, up from a current 10%.