The scandal-shrouded closure of the short-lived Hong Kong Mercantile Exchange (HKMEx) raised questions about its governance and regulatory oversight, but the key to its demise was a simple inability to compete.
Chairman Barry Cheung Chun-yuen's grand plan for a new commodities exchange was unveiled at a mid-2008 press conference featuring a video of Financial Secretary John Tsang Chun-wah giving his blessing to the project.
Cheung's oil industry background, the promise of energy and commodities trading directly with the mainland and the clear support of the Hong Kong government - even though regulators had yet to grant the exchange a licence at the time of launch - gave the brokers who joined the HKMEx expectations of fast and furious trading, and profit.
Tsang's support was seen by analysts as an official endorsement of fresh competition in financial markets.
Hong Kong Exchanges and Clearing had monopoly status in stock trading, while the Chinese Gold and Silver Exchange Society had traded gold for more than 100 years in the city. The missing piece was an exchange to tap into rising mainland demand for commodities.
"We joined the HKMEx as its membership fee was low and we believed if it had a good turnover, participating made sense," said Ben Kwong Man-bun, chief operating officer of KGI Asia and one of the 37 broker members of the exchange.
"However, two years on, the turnover was so low that we did not do much trading at all."
When Cheung announced on Saturday that he had handed the HKMEx licence back, only 181 contracts were left to be settled.
In contrast, the London Metal Exchange, which Hong Kong Exchanges and Clearing bought in 2012, saw record volume last month of 14.5 million lots traded. The Chicago Mercantile Exchange, the world's biggest commodity trading platform, traded 11.6 million contracts daily.
Liquidity is one of the most important factors for brokers when choosing an exchange. Failing to provide it is fatal.
HKMEx also suffered from a forced shift in its original plan when, a year after it launched, the mainland imposed restrictions on overseas oil trading, forcing the exchange to scrap its energy trading ambitions. The exchange turned to gold trading instead, intending to ride a wave of investor demand in the wake of the global financial crisis of 2008-09 that sent the precious metal surging through a succession of record highs. But the HKMEx found it impossible to rival the Chinese Gold and Silver Exchange Society's turnover of up to HK$80 billion a day.
Besides lacklustre day-to-day dealing, the exchange's licence application was a fraught one.
HKMEx was conceived as an authorised exchange operator, giving it the same status as the HKEx. It never got it, according to a source familiar with the situation, because HKMEx could not meet the Securities and Futures Commission (SFC) requirement to provide a clearing and settlement function for trades made on it - effectively being unable to put up enough money to pass a financial strength test.
Instead it had to settle for a lower-grade licence as an automated trading services (ATS) provider.
This led Christopher Cheung Wah-fung, the legislator for brokers, to ask why the SFC allowed the HKMEx to continue to brand itself an exchange.
"This has given a false impression to overseas investors. Now it has closed with financial problems and many overseas investors may well question the strength of other exchange operators without being fully aware of the fact that HKMEx only held an ATS licence and was not an authorised exchange," Cheung said.
He said the SFC was too lenient with the HKMEx, allowing it to voluntarily surrender its licence when it had been clear for many months that the exchange was struggling to attract the business needed to meet its regulatory obligations.
1 Who are the three men under arrest?
2 What exactly is the "false instrument" under investigation?
3 How much money is involved?
4 When was Leung Chun ying told?
5 At what point did the SFC hand over the investigation to the police?