The introduction and expansion of the CONNECT trading system between Hong Kong and mainland China have put the Hong Kong Stock Exchange in the limelight. This market continues to expand, enhance trade execution and utilise the latest clearing services technology. Often overshadowed by other markets in Asia, how old is the Hong Kong Stock Exchange and how did this growing market evolve over the years?
Ownership
The Hong Kong Stock Exchange is a wholly-owned subsidiary of the Hong Kong Exchange and Clearing Limited Company. The origins of the stock market can be traced back to 1891 when it was initially known as the Association of Stockbrokers in Hong Kong, with the region under UK control. The exchange changed its name to the Hong Kong Stock Exchange in 1914 and merged with the Hong Kong Stockbrokers Association, an all-Chinese stock exchange, in 1921. Yet more exchanges emerged in the following years due to impressive economic growth in the region.
The 1987 crash
Trade execution and clearing services came under the spotlight in the aftermath of the 1987 market crash, with a considerable outflow of funds. Conscious of the need to enhance investor confidence in trade execution and clearing services, the authorities instigated a total restructuring of the exchange and regulatory framework. Implementing central clearing services and a settlement system that supported high-volume trade execution was a turning point. In addition, the creation of the Hong Kong Securities Clearing Company put the regulatory side on a more even keel, prompting significant growth in trading volumes.
Regulatory history
We have seen numerous changes in the regulatory setup for the Hong Kong Stock Exchange, with the Securities and Futures Commission of Hong Kong now in charge of regulating securities and futures markets. While there is no doubt that the 1987 crash was a massive blow to the Hong Kong Stock Exchange and the region as a whole, it forced a complete reorganisation of the financial services industry. Integrating Hong Kong and Chinese Stock Exchange services has created a massive opportunity for long-term growth within a rigid and reliable statutory framework.
Minimum capitalisation
In 2017, what many already saw as restrictive conditions to join the Hong Kong stock exchange were tightened. Companies looking to join the Hong Kong Stock Exchange must now have a minimum market capitalisation of HK$500 million and a public float of at least HK$125 million. In addition, as clearing services were developing and trade execution platforms were taking advantage of the latest technology, the authorities decided to tackle the liquidity problem.
Trade execution and liquidity issues
Liquidity is an issue across all stock markets; what often start as relatively large companies can encounter problems and become relatively small over time. This can significantly impact liquidity and the ability to carry out trade execution in significant sizes. For example, the move by the Hong Kong Stock Exchange was seen by some as controversial but has created a market which offers more efficient and reflective pricing of stock.
Summary
It is fair to say that the Hong Kong Stock Exchange has a long history and one that has been relatively active. The merger of various organisations, enhanced regulations, and the complete restructuring of exchanges post-1987 have been impressive.The recent introduction of the CONNECT listing service between Hong Kong and mainland China is expected to pre-empt yet another surge in trading activity!