To be world-class, the HK exchange needs to cut fees
with Jake van der Kamp
'Hong Kong and the mainland should develop a single China market that could challenge the trading power of exchanges in New York, Tokyo and London, the chairman of the local bourse said yesterday.'
SCMP, Sept 14
It's an interesting notion, this idea of trading power. I'm sure it thrills bureaucrats and can even make some stockbrokers lick their lips.
Ask yourself, however, just what does it mean to you when you come to buying a few shares.
Do you really care that the stock exchange can impress the girls by flexing its biceps? Does it really make any difference to you that people may say, 'Hey, there goes Mr Big' when the chairman of the exchange steps out of his car.
No, what matters to you is that you get your shares at a good price, that the transaction goes through smoothly with no unnecessary bother, that you can easily and safely lodge the stock and that the fees you pay, including stockbrokers' commission, are low ones.
You also want a reasonable degree of comfort that stocks listed on this exchange are not straight acts of piracy and that the stockbrokers with seats on the exchange are subject to some rules that they will not break too easily lest they lose their seats.
And as to that vaunted trading power of the exchange, well, let's see how many different ways we can find of saying that it makes no difference to you at all.
In fact, the hallmark of a good exchange is that you are hardly even aware of it, that its costs are so low, its operations so efficient and its listings and intermediaries so well regulated that the mechanisms of how you buy securities do not come to your attention.
Steady advances in communications technology mean that this kind of exchange is now evolving in a way never possible before, increasingly as alliances around the world of what were previously older-style exchanges. This new style has no floor, no boards, no booths, no desks, only communications signals flying around the world.
In fact, the sole reason that it is linked to any geographical location at all is so that it can be linked to recognised legal and regulatory regimes. No one has yet ever found a way of freeing these from their geographical constraints and they are needed to ensure the security of transactions.
Thus, trading power in the modern world of stock exchanges is actually a denial of power. Those who succeed make the least of themselves, not the most, and if our government wants Hong Kong Exchanges and Clearing to be at the forefront of this success, it should focus first of all on reducing transaction costs.
One measure it can take immediately is to abolish the stamp duty on contract notes. This raised more than HK$15 billion for the public purse last year, which was more than 5 per cent of fiscal revenues and almost double what taxes on horse betting brought in.
But while it's all very well to see money flowing into the public purse, we must now recognise that we have a choice to make. Do we want the money or do we want a world-class stock exchange? It's unlikely we can have them both.
Then we can look at the fees and charges from which the exchange makes its money. After-tax earnings of HK$2.52 billion last year represented a stellar 52.5 per cent return on equity, and HKEx has so little idea of what to do with the money that it returned 90 per cent of it to shareholders as dividends.
If we are out to create a world-class stock exchange, which inevitably means a low-cost one, a better idea would be to return that 90 per cent to market participants in the form of lower fees and charges.
It will never happen, of course. The monopolists of this monopoly business now number our government, with a 5.88 per cent stake of HKEx, as the most prominent of their members.
It creates a serious conundrum for the financial secretary. He is meant to seek as high a return as he can get on public investment funds but the only way that he can improve the efficiency of the exchange is to work on getting a lower return on the public money he has invested in it. He has created a conflict of interest for himself.
But I doubt that he understands this yet, as I doubt that he understands how much he threatens Hong Kong's future as a service centre when he makes noises of a merger of HKEx with the Shanghai stock exchange to create a single China market.
Leave alone that it simply cannot be done while the mainland maintains a closed capital account, does he realise what the impact would be in Hong Kong for lawyers, accountants and finance professionals?
If Hong Kong is to accept Shanghai listings, then the fastest way to get a listing in Hong Kong is to do it in Shanghai.
This is simple. You pay the lawyer 5,000 yuan, you pay the accountant 5,000 yuan and, if you have property among your assets, you pay the valuer 5,000 yuan. They will all take the view that it's a very good return for giving you the pieces of paper that are your ticket to a listing.
What a great way to build up financial services in Hong Kong. What a great way, too, of building investor confidence in the Hong Kong marketplace, challenge New York and London, you know.