Advertisement
Advertisement

HKEx rejects plan to narrow spreads

Small brokers win 13-year fight after exchange board votes against trading proposal for cheap stocks

The board of Hong Kong Exchanges and Clearing has handed the dwindling corps of small local brokers a victory by rejecting a proposal to narrow trading spreads for the almost 700 stocks that trade at less than HK$2.

A director who asked not to be identified said the board decided not to reopen the question of spreads which for 13 years has pitted small local brokers against their large, mostly international rivals, unless there was a fundamental change in market conditions.

Small brokers argued that where spreads - the difference between the bid and offer prices - of more expensive shares had been narrowed, retail investors, on whom they depend for survival, had pulled out of the market. But larger brokers that are active derivatives traders wanted narrower spreads to gain lower transaction prices and more freedom in hedging.

The director said the board debated the question for three hours before voting nine to one against a narrowing for the cheapest stocks, going back on its own year-earlier decision, whose implementation had been delayed pending a review.

Investor and corporate governance activist David Webb was the only director to vote in support of the proposal. His ally Christine Loh Kung-wai did not attend yesterday's meeting.

'Obviously I am disappointed that HKEx has flip-flopped on this and has put the interests of a small group of small brokers, who are afraid of competition on commissions, ahead of the greater interest of Hong Kong as an efficient international financial centre,' Mr Webb said. 'Having a 2 per cent spread on shares trading at 50 cents is ridiculous. It is 10 times wider than the 0.2 per cent spread at HK$5.'

Mr Webb said he would not give up. 'I will encourage all respectable companies with prices below HK$2 ... to consolidate their shares so as to move into a more efficient pricing range. This will help distinguish them from some of the heavily manipulated junk stocks at the bottom of our price range. Although the consolidation involves some administration costs, it is worth it.'

Vincent Lee Kwan-ho, a director of a small broker, said a review of the past six months' trading activity showed that narrower spreads on more expensive stocks had discouraged retail investors from day trading and reduced small firms' commission earnings. The smallest brokers now have just 11 per cent of market share, compared with more than 50 per cent for the top 40 firms.

Mr Lee said stocks of less than HK$2 represented almost 70 per cent of the 1,174 listed firms but their turnover was only 15 per cent of the total. 'Deciding against the change gives retail investors room to trade these stocks and will not affect the overall market,' he said.

The battle over spreads between large and small brokers has waxed and waned since 1994. That year the exchange ordered a narrowing of spreads for stocks trading below HK$10 but retail brokers and investors forced it to back down two months later. In July 2005, the exchange cut the spreads of 36 stocks trading above HK$30. In February last year, it decided to cut spreads of all stocks trading at less than HK$20, leaving those in the HK$20 to HK$30 range unaffected.

In June last year, the opposition of small brokers again forced the exchange to backtrack; it exempted shares trading at less than HK$2 from the narrower spreads, pending a review at yesterday's board meeting.

July 1994: All spreads narrowed by half, prompting complaints from brokers and retail investors

Sept 1994: Exchange restores spreads for stocks trading at less than HK$10

July 2005: Spreads narrowed for 36 stocks trading at more than HK$30. Stocks trading at between HK$20 and HK$30 left unchanged

Feb 2006: Plans announced to narrow spreads of all stocks trading at less than HK$20

June 2006: HKEx partially backs down, offering sixmonth review of stocks trading at less than HK$2

July 2006: Spreads narrowed for 280 stocks trading at between HK$2 and HK$20

Feb 2007: Plan to narrow spreads of about 700 stocks trading at less than HK$2 scrapped

Post