Hong Kong Exchanges & Clearing Ltd.’s plan to begin after-hours futures trading in the city is fueling concern it will force small brokerages to close and lead to further concentration of market share.
The world’s largest exchange company by market value plans to introduce in March a trading session from 5 p.m. to 11 p.m. for contracts on the Hang Seng Index, the Hang Seng China Enterprises Index and gold. The plan will place too much of a cost burden on the small brokers to stay open and manage risk during that time, said Francis Lun, Hong-Kong based managing director at Lyncean Securities Ltd.
The extra session will allow investors to hedge and adjust positions when news breaks in European hours, the exchange operator that owns the London Metal Exchange said in a submission to the city’s legislature. Local brokers are concerned that changes to Hong Kong’s market structure, with longer trading hours and the reinstatement of a closing auction, will mean they can’t compete.
“If you don’t participate your business will go away,” Lun, who also is president of the Hong Kong Institute of Financial Analysts, said in a telephone interview. “It’s really a no-win situation. You are forced to expand the trading hours by the futures exchange, but your increased trade or revenue will not be able to cover the increased cost.”
After-hours futures trading on the world’s sixth largest bourse by market capitalization is set to begin in March, pending approval from the Securities & Futures Commission, said Lorraine Chan, a spokeswoman for Hong Kong Exchanges.
Of the 571 Hong Kong stock-exchange participants, the biggest 14 accounted for 58 percent of the market in December and the largest 65 were responsible for 89 percent, according to statistics from the bourse’s website.
Representatives from the Hong Kong Securities & Futures Professionals Association, the Hong Kong Securities Professionals Association and the Hong Kong Securities & Futures Employees Union spoke in opposition to after-hours futures trading at a Hong Kong Legislative Council financial affairs meeting on Jan. 28. Eight people spoke against the proposal at the hearing while 12 supported it.
Forty-six companies and professionals, including Johannesburg Stock Exchange Ltd. and Bombay Stock Exchange Ltd., wrote in on the topic. All 32 of the English-language submissions made public on the SFC website were in favor of the proposal.
“Just because some firms do not believe it will add to their bottom line does not mean Hong Kong should put on blinders and fail to compete on the global landscape,” David Friedland, managing director in Asia Pacific of Interactive Brokers Group Inc., a brokerage firm, said at the hearing. After-hours futures trading “will address market demand, increase the visibility of Hong Kong on the global stage and will be a net benefit to the local economy.”
The city’s brokers protested after the exchange shortened its lunch break and promised to reinstate a closing auction for trading. Hong Kong Exchanges said shortening the midday break to one hour was necessary to align trading hours with China and is pressing for a closing auction to bring trading in line with international standards. The bourse previously had a two-hour break for lunch, the longest of any developed market.
After-hours futures trading also creates the infrastructure to later offer Chinese yuan, interest-rate and commodity futures, the exchange said. Global exchange operators including CME Group Inc., ASX Ltd., NYSE Euronext, Deutsche Borse AG and Japan Exchange Group Inc. offer after-hours futures trading on their derivatives platforms, the Hong Kong exchange noted in its initial consultation paper in May 2011.
Representatives from the three industry associations said it could adversely impact financial stability and add to market volatility. The exchange has proposed to limit price swings to 5 percent price during evening derivatives trading.
“We don’t want to stop globalization, however, our market is regional not global,” David Wong, chairman of the Hong Kong Securities & Futures Professionals Association, said at the Jan. 28 meeting. “This is different from commodities, gold and forex, where there can be around-the-clock trading. It’s difficult to control or manipulate such markets.”