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SCMP Reporter

The futures exchange is facing what many observers believe is a do-or-die test for its plan to shift Hang Seng Index (HSI) futures to electronic trading.

 The final, fourth test of the exchange's Hong Kong Automated Trading System (HKATS) this Saturday is likely to be the last chance to prove the HSI Index migration plan can proceed on schedule, according to sources at the Securities and Futures Commission.

 The SFC's board on Monday postponed approving the plan because of delays in simulated order executions and breakdowns in the HKATS during the first three rounds of tests.

 The board told futures exchange officials it would not approve the migration plan until testing could generate satisfactory results.

 'Saturday's test is crucial for us,' futures exchange executive director Royce Yuen said yesterday.

 'We have to prove the readiness of our system.'  Much is riding on the success of Saturday's test.

 Another failure would most likely push back the scheduled August 2 start-up of electronic trading for HSI futures.

 Moreover, it would weaken the futures exchange's bargaining position in negotiations with the stock exchange about its value in the Government's proposed merged exchange.

 The futures exchange's financial adviser, Morgan Stanley Dean Witter, has projected the exchange's earnings on the assumption that HSI futures would be trading electronically on August 2 and significantly bolster turnover and profitability.

 Morgan Stanley has advised the futures exchange should get a 47.8 per cent share of the merged entity. However, stock-exchange adviser Merrill Lynch has said it should have only 11 per cent.

 Making matters worse for the futures exchange is a system-freeze restriction which rejects any big computer-system changes to avoid possible confrontation with Y2K compliance.

 This means the HSI futures migration plan would need to be delayed until early next year if it is not adopted soon.

 To make sure this Saturday's simulation proceeded smoothly, the exchange was making an all-out effort eliminate errors, exchange sources said.

 It has also placed restrictions on the upcoming test because of concerns that problems were the result of excessive trades being pumped into HKATS.

 'Some traders in the simulation were over-enthusiastic and pumped in numbers beyond the normal trading environment,' Mr Yuen said.

 In last Saturday's test, for example, the exchange said a trader with the six-month average of 6.5 trades a day had inputted 1,458 trades.

 In order to eliminate excessive trading, the exchange would not allow traders to pump into the system more then four times their usual trade levels, an exchange source said.

 Any trader who failed to comply with this guideline could be penalised, he said.

 'We are going to prove the readiness of HKATS,' Mr Yuen said.

 Nonetheless, the SFC might not be satisfied with a 'restricted simulation', a source at the SFC said.

 The SFC was not sure such a test, even if successful, would reflect the readiness of the HKATS, he said.



Crunch time for electronic trading hopes