Hong Kong To Maintain Stock Exchange Competitiveness
Friday, April 08, 2011

In reply to a question in the Legislative Council, the Secretary for Financial Services and the Treasury, Professor K C Chan, has said that the government will continue to maintain the competitiveness of Hong Kong's stock exchange.

The question referred to indications that, although the market capitalization of the securities traded on the Hong Kong stock exchange is the world's seventh-largest, and the financial services industry in Hong Kong accounts for about 16% of its gross domestic product, securities turnover in Hong Kong in 2010 was only 10th because of the high trading costs.

Reports have suggested that securities trading costs in Hong Kong are 35% and 25% higher than those in the US and the UK respectively, which discourages institutional investors from trading frequently and thus impacts on the overall trading volume.

Overall trading costs cover the cost of spreads, brokerage charges and other implicit costs of implementing a trade arising from the difference between the price that the investor intended and what was actually executed. The latter, it was said by Chan, relates to spreads and, according to some brokers, the lack of anonymity whereby some orders can be paired with the broker's identity.

In the past, he added, Hong Kong Exchanges and Clearing Limited (HKEx) has reduced spreads and considered anonymity, but these have turned out to be controversial with some market participants. However, HKEx still believes that such changes would be beneficial to the market, and it will continue to engage with the market on the best way forward.

A further part of the question asked whether the government had considered encouraging the development of 'dark pools' in Hong Kong to keep trading costs down and boost trading.

Chan confirmed that there are already 13 dark pools operating in Hong Kong. They are mainly brokers/banks' internal crossing engines whereby their customers' orders can be channelled to the internal pool for matching. Currently, trades conducted in these dark pools are required to be reported to HKEx, and HKEx then provides post-trade transparency through its market data system.

However, he noted that the emergence of dark pools has also raised concerns over the lack of transparency which could create a two-tiered market that deprives the public of information about trades and liquidity. He pointed out that other countries, including the US and the European Union, are reviewing their regulatory framework for dark pools in relation to, among other things, transparency.

Hong Kong’s Securities and Futures Commission (SFC) has been actively participating in international discussions on regulatory issues related to dark liquidity, and the government and the SFC will continue monitoring the development of dark pools in Hong Kong and other major markets.