Hong Kong’s stock exchange is counting on hundreds of millions of mainland Chinese investors, traders and speculators to provide the liquidity that high-frequency traders supply in most other major markets.
While HFT firms are the dominant market makers in U.S. stocks, currencies and other assets, a trading tax mostly keeps them out of Hong Kong equities. Hong Kong Exchanges & Clearing Ltd. has another source of volume: investors from the Shanghai Stock Exchange who can now buy and sell in Hong Kong. Another link is planned with China’s bourse in Shenzhen this year.
“Individual investors from China could in fact fill a void that may look like high-frequency trading,” said Brett McGonegal, executive managing director at Reorient Group Ltd., a Hong Kong-based investment bank.
Volume has already surged since the link with Shanghai opened in November. The Hong Kong exchange saw a record HK$292 billion ($38 billion) change hands on April 9. Daily trading since the start of April is almost triple the level during the comparable period last year.
Markets such as the New York Stock Exchange rely on HFT firms as the leading providers of offers to buy and sell. They tend to generate slim profit margins off each transaction, making Hong Kong’s 0.1 percent stamp duty on stock trades a deterrent.
An influx of Chinese traders could make the Hong Kong exchange look more like a market where HFT firms do operate, according to Hong Kong Exchanges & Clearing’s Romnesh Lamba, co-head of global markets at the bourse.
“Maybe in the West it’s been high-frequency trading, maybe over here it’s retail,” Lamba said in an interview. “This is here to stay. The market will adapt to it.”
The liquidity provided by Chinese investors, who have more than 200 million stock accounts on the mainland, may also come at a price in the form of higher volatility, according to UBS Group AG.
“Mainland investors have an inherent sentiment and momentum-driven bias when trading,” said David Rabinowitz, the head of direct execution for Asian equities at UBS. “That is something as investors and brokers we have to be prepared for.”
Mainland investors have so far bought about 99 billion yuan ($16 billion) of Hong Kong shares through the Shanghai link, or less than 40 percent of the program’s aggregate quota.
Retail investors “will drive a reduction in an average size of a transaction,” said Stephane Loiseau, head of cash equities and global execution in Asia-Pacific at Societe Generale SA.
Optiver Holding BV, an HFT firm, does operate in Hong Kong, but its focus is exchange-traded funds, options and futures, which mostly avoid the city’s stamp duty. Daniel Weinberg, the head of business development at Optiver in the Asia-Pacific region, expects the flood of orders from mainland China will improve Hong Kong.
“It’s going to make the Hong Kong market a much healthier market,” Weinberg said by phone from Sydney. “It’s natural business. It’s not like a professional trying to cherry pick.”
Greater volume will make it cheaper to place large trades, said Calvin Tai, the head of global clearing at the Hong Kong exchange.
“The market composition of the Hong Kong market is changing dramatically and potentially forever,” Rabinowitz said.