Third time lucky for Hong Kong bourse as gold futures trading gets off to a glittering start

The two new gold futures has over 29,074 contracts in their first seven weeks of trading, which has helped stock brokers to diversify their income source.

PUBLISHED : Sunday, 27 August, 2017, 2:46pm
UPDATED : Sunday, 27 August, 2017, 10:13pm

Hong Kong stock exchange’s successful launch last month of gold futures was a boon for the city’s beleaguered brokers, offering the small-and-medium firms that are feeding off the crumbs of the bourse extra trading activity and fee income, at a time when equities transactions have slowed to a trickle.

“The gold futures launched last month was a good beginning,” said Alfred Yeung Ping-kwan, founder and chairman of Glory Sky Group, a mid-tier broker and market maker for the yuan-denominated and dollar-denominated gold futures products in the city. “This is still far from a huge success like in the US, but at least we have taken a good start with a new product at the stock exchange.”

It’s third time lucky by the Hong Kong stock exchange, in its attempt to introduce gold futures trading, as it seeks a broader selection of investment options to cement the city’s role as Asia’s financial centre.

“The more the products, the more income for brokers,” said Yeung. “We would like the HKEX to introduce more products. We all need to diversify our income sources,” said Yeung.

The first attempt was made during the 1980s by the Futures Exchange -- now a unit of the Hong Kong Exchanges & Clearing Ltd, or HKEX -- but scrapped in the mid-1990s due to lacklustre interest. The exchange’s previous attempt, made at the height of the global financial crisis in 2008, again met with a dismal end when transactions almost trickled to nought, forcing for the contracts to be scrapped in March 2015.

This time around, trading has picked up, along with a rise in the price of precious metals, as investors sought sanctuary amid increasing political instability in the US and around Asia, and while valuations of global equities looked excessive.

Another big change is the allowance of physical settlements in gold futures, instead of cash settlements like the two previous attempts, which attracted end investors to the trades, said Yeung.

The two gold futures, introduced on July 10, had a combined 29,074 contracts traded as of last Friday, or 856 contracts on average everyday.

“The price of gold has been volatile recently, which has increased the need for investors to hedge their investments,” said Jasper Lo Cho-yan, the chief strategist at King International Financial. “The yuan has strengthened against the US dollar, which has attracted investors to the yuan-denominated gold futures.”

The good start to gold futures trading could put the HKEX in a position to extend the trading hours for the contracts, and cut down the transaction costs, said Yeung.

“The gold market in the HKEX can only trade 16 hours a day, shorter than the Chicago Mercantile Exchange, which trades 23 hours a day,” Yeung said. “The trading cost of gold futures in Hong Kong is also three times higher than in the US.”

Still, trading is currently dominated by professional investors instead of retail traders, which prevents retail brokers from cashing in on the bonanza, said Haywood Cheung Tak-hay, president of the Chinese Gold & Silver Exchange Society.

“It’ll only bring in more income to retail brokers if the gold futures can be widely traded by retail investors,” Cheung said. “Some people may be of the opinion that the HKEX gold products will compete with the Chinese Gold & Silver Exchange Society. But in fact, it’ll be good to have active gold trading in the two exchanges to create more hedging and arbitrage among the different markets.”