Hong Kong Exchanges & Clearing Ltd., one of three remaining bidders for the London Metal Exchange, should lose government protections against competition if it begins commodities trading, Hong Kong Mercantile Exchange Chief Operating Officer William Barkshire said.
Hong Kong Exchanges, Intercontinental Exchange Inc. and CME Group Inc. are the remaining contenders for the LME, which handles more than 80 percent of global metals futures, after NYSE Euronext, the biggest U.S. exchange owner, was removed from the bidding. The Chinese bourse was overtaken as the world’s largest market company by CME Group this year and is seeking to broaden its business as the pipeline of large initial public offerings from the mainland slows.
“In the event that HKEx competes with others in commodities and other asset classes either via the potential acquisition of the LME or organic growth, it is only right that as a condition the authorities should remove its favored nation status,” said Barkshire, who was previously director of strategy at the London Stock Exchange.
No other bourses or alternative venues may compete with Hong Kong’s main public exchange without government approval, according to the city’s Securities and Futures Ordinance. The only approved equity platforms have been so-called dark pools, trading venues that don’t display prices and in Hong Kong exclude retail investors.
“We would definitely be interested in Hong Kong if Hong Kong was interested in competition,” Tal Cohen, chief executive officer of Chi-X Global, which operates alternative trading venues in Canada, Japan and Australia, said in a May 17 interview. “It’s not a reflection of our view of the Hong Kong stock exchange as much as our view of the Hong Kong market and the potential that that market has.”
The Securities and Futures Ordinance identifies the bourse operator by name and prohibits others from operating a stock exchange that allows the public to trade unless it is either the main bourse or controlled by the main bourse. Hong Kong Exchanges operates the city’s only retail share market, its equity futures venue and the clearing company.
The Securities and Futures Ordinance doesn’t prevent others from offering securities trading, said Scott Sapp, a spokesman for Hong Kong Exchanges. “In principle, HKEx welcomes competition as long as there is a level playing field,” he said.
The bourse’s shares fell 2.8 percent to HK$107.7 as of the midday trading break in Hong Kong, its lowest level in eight months. They have retreated 13.2 percent this year.
The Hong Kong Mercantile Exchange began trading gold futures last May and silver contracts in July, both denominated in U.S. dollars. Those are the only contracts available. It said in March that it’s planning to offer gold, silver and copper futures contracts denominated in China’s yuan.
Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, bought a 10 percent stake in the Hong Kong Mercantile Exchange in December.
“HKEx effectively derives monopoly rents from the market, for example via requirements to report transactions and use it as a clearing and settlement venue,” Barkshire said. “This underpins its significant profit margins and current high market capitalization.”
Last year, the exchange’s profit margin was 74 percent, the highest of any bourse, according to data compiled by Bloomberg. Bolsa de Valores de Lima SA and ASX Ltd. are tied as the second most profitable with 58 percent profit margins last year.
“Competition under the right conditions is good for all market users in terms of costs, service levels and innovation,” Barkshire said. “This should also include both the listing and trading function of exchanges as is the case in other financial centers which seek to compete globally.”