Shorter lunch breaks will help the Hong Kong Stock Exchange compete more effectively against the mainland exchanges for listings of Chinese companies, but the exchange will need to do more than simply increase the length of its trading day in order to attract liquidity and increase volumes in its market, says Alison Crosthwait, director of global trading research at global agency broker Instinet.
Crosthwait's analysis of trading volumes for long-term component stocks of Hong Kong's Hang Seng Index shows that average daily volume in many blue-chip names has actually fallen since 1997, indicating that it's the number of new issues, and not increased trading velocity, that has primarily driven HKEx trading growth.
As of December 2010, daily turnover averaged HK$43.4 billion (US$5.6 billion) in Hong Kong, compared with US$17.5 billion and US$15.3 billion on the Shanghai and Shenzhen stock exchanges respectively. According to ITG data, spreads averaged 29.13 basis points (bps) in Hong Kong as compared to 11.3 bps in Shanghai and 11.5 bps in Shenzhen.
“I don't think it [longer trading hours] will particularly help, either in terms of getting more short-term opportunistic traders into the market or increasing overall trading levels,” she says, adding that one of Hong Kong's competitive advantages is its easier access to the rest of the world and its ability to attract foreign capital.
Starting 7 March, the trading sessions of Hong Kong Exchange and Clearing's securities market run from 09.30 to 12.00 (previously 10.00 to 12.30) and then from 13.30 until 16.00 (previously 14.30 to 16.00). The Shanghai Stock Exchange is open from 09.30 and 11.30, after which the afternoon session begins with a continuous auction between 13.00 to 15.00, then block trading takes place between 15.00 to 15.30. On 5 March 2012, Hong Kong equity traders' lunch break will be shortened by a further 30 minutes, with the start of trading being brought forward to 13.00.
“Since 7 March, many traders have found their attention split between Hong Kong and Singapore, making it more difficult to obtain quality fills. It remains to be seen if this difficulty is merely early growing pains or a larger structural issue,” she says.
The Singapore Exchange (SGX) had planned to introduce all-day trading to its securities market on 1 March – eliminating the current 90-minute lunch break – but has now pushed the change back to an unspecified date in the second quarter. The Tokyo Stock Exchange (TSE) also intends to shorten its current 90-minute lunch break to one hour – 11.30-12.30 – in H1 2011.
In her latest report, ”Asia-Pacific market hour changes: a distraction?' released on 22 March, Crosthwait noted several factors impacting volume growth in Hong Kong – lack of competition, high clearing costs, high retail volumes, stamp duty, absence of closing auction and lack of anonymity.
HKEx's is in the middle of a three-year plan to equip the exchange for competition with the Shanghai and Shenzhen exchanges that includes a HK$750 million technology upgrade covering its matching engine, market data platform and co-location services.
A central plank of the HKEx's strategy is to establish itself as the leading offshore platform for renminbi-denominated trading and investment.
The Instinet report also noted structural impediments to volume growth in the markets of Australia, Japan and Singapore. “Though trading value in the region has increased in the past decade, the velocity of trading has not. While the changes in trading hours are significant and signal a move forward, it is clear that competition is not fully formed in Asia. For trading volumes to grow, the issues impeding competition in the region must first be addressed,” says Crosthwait.
Both volume and turnover have increased in Japan due to the increased speed and capacity of the TSE's arrowhead platform, the introduction of competition and fair access to a central clearing counterparty. However, there remain constraints to the growth, including Japan's rigorous requirements for proprietary trading system licences, onerous regulatory requirements, the reluctance of domestic investors to support alternative liquidity venues, as well as the lack of recognition of commission sharing agreements by Japanese regulators. “Execution cannot be rewarded to the same extent as it is in other markets, thereby constraining the penetration of electronic trading,” Crosthwait adds. “If the Japanese economy gets a lot worse than where it is now, and that there are really lasting impact from the earthquake, then we will see less innovation, less competition in their marketplace. But that's a big ”IF', and it would have to be a significant prolonged downturn from where we are now,” she said.
With the TSE and Osaka Securities Exchange reportedly considering merging, Crosthwait said the synergies arising from such a merger would be beneficial for both exchanges. “It will reduce their costs and they have very complementary products, so a merger would be a positive,” she notes.
A key issue highlighted by Crosthwait in the Singapore market is the comparatively high clearing costs of four basis points (with a maximum charge of S$600, approximately US$475, per trade) paid by the investor. “This is extremely expensive relative to other developed markets; for example, the cost of clearing in Japan is less than US$1). It should be noted that the SGX has lobbied the Monetary Authority of Singapore to lower these costs,” she acknowledges.
According to Crosthwait, Australia is a prime example of competitive threats spurring new trading infrastructure developments, citing PureMatch, an ultra-low latency execution platform for high-frequency traders launched by the Australian Securities Exchange (ASX) ahead of the expected entry into the Australian market of Chi-X Australia.
Crosthwait also notes the significance of the proposed ASX-SGX merger in the context of other deals that have recently been announced; LSE-TMX, Deutsche Börse-NYSE Euronext. “Because the SGX deal came first, people are going to be looking and if that gets turned down, its more likely the other two will get turned down by national regulators. I'm in favour of efficient markets, lower costs for investors and new functionality,” she says. “Australia is opening up to competition and Singapore has Chi-East as competitor, so we're already moving in that direction. It's now just a matter of whether these two exchanges will be successful in coming together.”
Author: Jill Wong