HKEx under pressure to change rules to attract institutional investors
Regulator under pressure to update market closing mechanism, extend trading hours and ease listing rules to draw more institutional investors
An outdated market closing mechanism, trading hours that are too short and restrictive listing rules are among areas Hong Kong Exchanges and Clearing should improve, analysts and traders say.
Despite strong turnover that saw HKEx announce a 34 per cent year-on-year increase in first-quarter profit yesterday, analysts say improvements are needed to attracting more institutional investors.
Revenue from listing fees fell 13 per cent in the first quarter, triggering further calls for a review of local listing rules to attract more new listings.
"Introducing a closing auction and volatility control mechanism would be a significant step towards attracting more institutional investors to the Hong Kong market," said Nick Ronalds, managing director of the Asia Securities Industry & Financial Markets Association.
"Volatility controls are a necessary mechanism in the age of electronic trading. Closing auctions are proven mechanisms for creating fair and efficient closing prices with reduced volatility. They benefit all investors by reducing execution costs and execution risks."
Stock markets in most countries use auctions to set closing prices through tenders by traders, with the most common order becoming the closing price.
HKEx introduced a closing auction in May 2008 but scrapped it 10 months later after heavy selling pressure on March 9, 2009, sent HSBC down 12.47 per cent during the 10-minute auction period. HKEx then reverted to the previous method of calculating the median price of the last five orders to determine the closing price.
In January it proposed introducing a closing auction that would add a 5 per cent price cap during the auction period. It would also add a volatility control mechanism to give a five-minute cooling-off period if the prices of certain stocks - the 81 constituent stocks of the Hang Seng Index and the H-share index - moved up or down 10 per cent from the last trade five minutes earlier.
Hong Kong Investment Fund Association chairman Bruno Lee Kam-wing said the local fund industry supported the introduction of a volatility control mechanism and a closing auction and also wanted a bond trading connection with the mainland.
"HKEx could work with Hong Kong and mainland regulators to bring more bond products to list and to trade in Hong Kong," he said. "If Hong Kong could develop a parallel 'Bond Connect', international investors could increase their access to the mainland debt market and mainland investors could access debt instruments and bonds issued by international issuers."
From a fund distribution angle, Lee said HKEx could develop a fund dealing platform for retail brokers to sell fund products. That would be useful when Beijing introduced a mutual recognition scheme for cross-border fund trading between Hong Kong and the mainland.
Keith Pogson, a senior partner at accounting firm EY, said HKEx needed to invest more to improve its trading system to make trading faster and more convenient for international investors.
"The trading hours of both the stock and futures markets should also be extended so as to overlap with other time zones in Europe and the US to attract their investors to trade here," Pogson said.
Pogson also wants to see HKEx change the listing rules to allow dual-share listings by companies such as Alibaba, something it has consulted the market on.
"Hong Kong has good regulatory governance and laws to protect the interests of shareholders," Pogson said. "I do not see a great danger in introducing dual-share structures to the city. Allowing dual-share structures would attract more companies to list here and to provide more choice for investors."