Global link-up to see HKATS demise
The futures exchange will be forced to scrap its $100 million Hong Kong Automated Trading System (HKATS) if a plan to link with the world's two largest derivatives market proceeds.
Hong Kong Exchanges and Clearing (HKEC) chairman Charles Lee Yeh-kwong said the futures exchange wanted to join with the Chicago Board of Trade (CBOT) and Eurex and form a single trading platform.
CBOT is the world's largest derivatives market.
Eurex ranks second and combines the derivatives markets of Germany and Switzerland.
If such an alliance were formed, the automated trading system would be abandoned, Mr Lee said.
'If Hong Kong is to join the CBOT-Eurex alliance, it is necessary to build up a single platform among the three exchanges.' However, he said that since so much had been spent on the system by the futures exchange and its members, it might still be used for trade next year before another system is brought into operation.
On Monday, Mr Lee announced he was negotiating with CBOT and Eurex in an effort to create the world's largest derivatives market.
He said an official announcement on the proposed link-up would be made next month.
Under the proposed alliance, a single trading platform will allow the members of the three markets to trade in each others' products, Mr Lee said.
The alliance would also conduct a study on the creation of a single clearing system.
Competition will also be restricted among the three members, indicating that products already traded by other members in the alliance will not be launched.
On the abandonment of HKATS, Mr Lee said this was due to its being an OM-based system, rather than the DTB system in use by Eurex.
As a result, Hong Kong would need to develop the DTB system for single trading platform compatibility with Eurex.
CBOT, which uses the open-outcry method, will also consider adopting DTB, Mr Lee added.
DTB's ability to handle a large amount of turnover had proven its effectiveness as a trading system, he said.
'The number of contracts traded on Eurex is 20 times that traded in Hong Kong,' Mr Lee said.
Last year, CBOT recorded turnover of 281 million contracts, while 248 million contracts changed hands on Eurex.
In Hong Kong, only 10 million contracts were handled during the period.
As a result of the failed system tests, an August deadline for the transfer of Hang Seng Index futures and options to automated trading from open outcry was missed.
The system has so far cost the futures exchange and its 130 members $100 million each.
Adding the DTB system would entail further costs.
However, a futures broker supported the team-up as such an alliance would promote Hong Kong's market to the world.
He also said the adoption of a system other than HKATS would be a good move considering its past record of failure.
Mr Lee said an earlier version of the DTB system was in use at the stock exchange for trade in its stock option products.
Hong Kong employs a first-generation version of DTB, while Eurex uses the mark four model.