Reforms ensure orderly trading

Hong Kong is now the seventh largest stock market, in terms of market capitalisation, in the world.

And, to strengthen that position, it is important for the territory to develop and market new financial products and facilities, says Alvin W.K. Li of the office of the Commissioner for Census and Statistics.

The commissioner's office is one of the organisers of the International Statistical Institute Cutting Edge Conference on Stock Market Indexes and Index Derivatives Trading.

The Stock Market of Hong Kong has come a long way since the world equities market crash of October 19, 1987.

'There is a regulatory framework within which securities and futures trading can be conducted in a fair and orderly fashion,' Mr Li said. 'There has been many major reforms to rectify inadequacies in the system.

'The Stock Exchange of Hong Kong and the Hong Kong Futures Exchange act as the frontline regulators of their respective markets and members.

'The Securities and Futures Commission oversees the operation of the stock and futures market and tries to ensure that a balance is attained between the need to regulate the markets, with a reasonable level of investor protection, and the need to allow the markets to grow and develop.' Mr Li said the value of a stock was related to the measure of risk involved. This was defined as the variability of its return.

'There are different ways of measuring the variability. The standard deviation is a statistical measure commonly used for this purpose.

'If the standard deviation of a stock's return is known, then the value of a stock can be derived, assuming other factors relevant to the calculation are known. The reverse is also true.

'The standard deviation derived from the current stock value is called the implied standard deviation, or the implied volatility,' Mr Li said.

'The price of a stock option is related to the volatility of underlying stock. Using this relationship, the implied volatility of a stock can be derived from a given value of stock option. Investors can judge whether the actual standard deviation of a stock exceeds its implied volatility. If that is considered the case, the stock option is a good buy; otherwise, it is not.' Mr Li said index derivative trading in Hong Kong operated under a regulatory system of international standards and attracted local and international investors.

'Last year, the total turnover of HSI futures contracts reach $4.67 billion and $1.09 billion HSI options contracts were traded. The regulatory system is designed to ensure that the risk of disorder in the market is kept to a reasonably low level.

'An indication of the integrity of the futures market in Hong Kong is the authorisation granted for trading HSI futures in the US in 1994.

'It is claimed that derivatives markets have increased risk and volatility of financial markets. There is, however, no conclusive evidence to support this proposition.'