Small brokers pass up through train ticket
Costly upgrades for systems and research means that only the largest brokerages can afford to participate in the cross border trading scheme
Smaller Hong Kong stockbrokers are taking a more cautious view on the stock through train scheme - largely reflecting cost hurdles - as the larger players gear up for the programme that will link the city's market with Shanghai's.
The more than 110 brokers on board for the cross-border trading plan with Hong Kong Exchanges and Clearing represent 80 per cent of the exchange's total market turnover. Some 340 brokers, mostly smaller operators, are on the sidelines for now.
The need to dig deep for costly preparations - from system upgrades to the establishment of A-share research teams - explains why many smaller operators are sitting it out. "I think the through train would bring in new business but it involves investment in a trading system and research. It would be difficult for the small brokers to afford that," an official at a small brokerage said.
While caution reigns among the smaller operators, their larger peers are busy making preparations to capture new business from the scheme, expected to begin in October.
In April, Beijing announced the scheme would allow Hong Kong and international investors to trade up to 13 billion yuan a day, or 300 billion yuan in total, in A shares listed in Shanghai. Mainland investors can trade up to 10.5 billion yuan a day, or a total of 250 billion yuan, in Hong Kong stocks.
While the launch date has not been set, brokers in Shanghai and Hong Kong have been busy upgrading their trading system to match the scheme's requirements. They will participate in a connectivity test on August 23, followed by full-scale tests with the two exchanges and mainland brokers on August 30 and September 13.
Under the scheme, Hong Kong brokers cannot serve mainland clients wanting to trade in Hong Kong stocks; they can only make A-share trades for their Hong Kong clients. This will require investment in research teams to generate reports for clients willing to take the plunge on A shares.
Hang Seng Securities, a subsidiary of Hang Seng Bank, is among the brokerages that have joined the scheme. "We are preparing to provide A-share trading services to our clients once the through train starts," said Andrew Fung, executive director of Hang Seng Bank.
Fung said Hang Seng Securities was well prepared because, he claimed, it was the first Hong Kong broker with A-share research resources. It has set up an A-share research joint venture with Guangzhou Securities called GZS-Hang Seng Research.
Bank of China (Hong Kong) is another lender that is keen on the through train. Earlier this month it launched a website to report news and research information on A shares.
It has also begun hosting seminars to boost interest among its Hong Kong clients.
"Investor education is important as many Hong Kong investors do not have a lot of knowledge about A shares," said Chow Chak-chee, the head of product management at BOCHK. Hong Kong investors would be interested in investing in A shares as many of them are trading at low valuations, Chow said.
Ben Kwong Man-bun, a director of KGI Asia, said his firm would also trade A shares for customers. The Hong Kong brokerage's Taiwanese parent company has agreed to set up a joint venture on the mainland. This will help KGI Asia to have support in A-shares research.
"Our clients are mainly retail investors. They would invest in A shares in industries with good profit prospects," Kwong said. "The investors would need time to get used to the many different trading rules between Hong Kong and the mainland. I believe the initial trading volume will not be high but it will pick up in the long term."
Kwong said Hong Kong retail investors like day trading - selling the stocks they bought earlier that day - but the mainland bans this practice. In another key difference, the mainland markets suspend a stock from trading if it rises or falls 10 per cent in a day.
Stephen Hui, chairman and chief executive of Luk Fook Securities, said his firm would trade A shares for Hong Kong customers but also team up with mainland online information providers to promote trading of the city's stocks by mainlanders.
Hui said that while the through train would allow mainland brokers to conduct trades for mainlanders in Hong Kong stocks, the scheme is limited to about 220 of the largest Hong Kong stocks.
"Many mainland investors would like to invest in small players which are not covered by the stock through train scheme. They would like to directly trade through Hong Kong brokers and that would bring new business opportunities for a Hong Kong brokerage like Luk Fook," Hui said.