Division grows over stock market's need for speed
The Hong Kong stock market's benchmark Hang Seng Index is now updated every 15 seconds and its compiler is studying even faster updates to catch up with other stock markets around the world. But there is some division over the need for greater speed.
'If the index is updated too quickly, investors cannot read it clearly and it does not mean anything to them,' said Christopher Cheung Wah-fung, chairman of Christfund Securities.
But for investment banks, institutional investors and futures traders who use computer programs to trade derivative products, more frequent updates are regarded as necessary.
'The HSI is the benchmark indicator, and the more frequent the updates the better,' said Joseph Tong Tang, executive director of brokerage house Sun Hung Kai Financial. 'Since our company also trades futures and derivative products, we would like to see the index updated more frequently.'
Mark Konyn, chief executive of RCM Asia-Pacific, said he welcomed more updates even though they would not have an impact on the way he managed money.
Hani Shalabi, head of advanced execution services for Asia-Pacific at investment bank Credit Suisse, said faster updates might be welcome but were not critical. 'The index doesn't normally change much in 15 seconds, so it won't make a big difference to algorithmic index trading if the updating interval is changed to every second,' he said.
Credit Suisse, along with other investment banks, does not rely on the Hang Seng Index compiler's calculations for its trading or index based products.
'Our index products desk uses an in-house program to calculate changes to the index based on the price changes and weighting of the 46 constituent stocks,' Shalabi said.
The Hang Seng Index was originally created to provide information to the general public, but is now used to manage and monitor capital products, which is why the demands of institutional investors have become important.
The index compiler, a subsidiary of Hang Seng Bank, is a profit-making body and needs to keep its customers happy. When the famous benchmark began life in 1969 people had time for a long lunch before checking in on the closing price of their favourite stocks. It is a genteel period some brokers want to return to.
In 1969, staff from the compiler had to go to the stock exchange trading floor every day and use pen and paper to copy down the closing price of the 33 stocks. In those days chalk was used on a blackboard to mark prices on the main board. On its first trading day on November 24, 1969, the Hang Seng closed at a modest 158.50.
'The key challenge is to provide what the market needs. This is difficult these days as the needs of the retail public are different from the needs of institutional investors,' said Vincent Kwan Wing-shing, director and general manager of the compiler Hang Seng Indexes.
In update frequency terms, the HSI lags behind the United States, Britain, the mainland, Singapore, New Zealand and India. The US Dow Jones Industrial Average is updated every two seconds, while the Shanghai Stock Exchange Composite Index is updated every six seconds.
At its initial launch, the HSI was updated only three times a day - at 11am, 12.30pm and at the market close. In 1986 the frequency was changed to every minute after a computer-assisted trading system was introduced, and the index was used to make the first derivative in the same year. It was advanced to every 15 seconds after the government introduced the Tracker Fund.
The question of which new indices should be included is also the subject of some controversy.
The HSI had 33 constituent stocks at its launch in 1969 and in 2006 it was decided to gradually expand this to 50 stocks. It now has 46.
Though remaining a benchmark for retail investors, the HSI now has rivals such as the MSCI and FTSE which are used by institutional investors such as fund companies and pension funds, and issuers of derivative products.
'We use the HSI where clients express a preference. Sometimes clients prefer alternatives. We also use the HSI on some of our mutual funds,' Konyn said.
Kwan said the Hang Seng Indexes had tried to meet market needs by introducing other indices such as the four major sub-indexes and many other indices over the past two decades. These included the H-share index, introduced in 1993, the Red-chip Index in 1998, and the Information Technology Index in 2000. The Hang Seng Index now uses a market capitalisation weighting method which takes into account not just the price movement of stocks, but the free float market capitalisation of the companies. This is a method close to that employed by the S&P 500 but different from that used in compiling the Dow Jones Industrial Average, which is based only on price changes of its constituent stocks.
The biggest fall in the HSI occurred on October 26, 1987, when it plunged by 33.33 per cent. The strongest percentage increase was on October 29, 1997, when it rose by 18.82 per cent.
Looking ahead, Kwan said the index compiler wanted to continue serving both retail and institutional investors. 'We are not making huge profits, but we are happy to see our revenue support our investments in systems and people to provide sustainable and excellent services.'