IIAwards - Review of Hong Kong Exchange

As part of the recently announced IIAwards, in which we celebrate innovations in the fintech and crypto industry, today we will review Hong Kong Exchange.

Hong Kong Exchanges and Clearing Limited (HKEX) operates a stock market and futures market in Hong Kong through its wholly owned subsidiaries the Stock Exchange of Hong Kong Limited (SEHK) and the Hong Kong Futures Exchange Limited (HKFE). The Group also operates four clearing houses in Hong Kong. With a total market capitalization of over HK$42.55T as of the end of August 2020, HKEX is one of the largest exchanges in the world by market capitalization of listed companies. As of the end of August 2020, there were 2,509 companies listed on HKEX's securities market.

HKEX is a world-leading capital raising venue for Hong Kong, Mainland Chinese and international issuers. As of 2019, the Hong Kong Exchange has 2,449 listed companies with a combined market capitalization of HK$38.2 trillion. The five largest companies by market capitalization include Alibaba Group Holding Ltd. – SW; Tencent Holdings Ltd.; China Construction Bank Corporation – H Shares; China Mobile Ltd. and HSBC Holdings plc. Additionally, the exchange services 12,795 listed securities, including interest rate and cross currency swaps, real estate investment trusts, forex and commodities derivatives and other instruments.

Uniquely positioned at the intersection of Chinese and international capital flows, Hong Kong has long been connecting China with the world. What is more, Hong Kong ranked as No. 1 Global IPO formation centre in five of the past eight years. Additionally, the Hong Kong Futures Exchange operates a multi-asset derivatives exchange that saw 263 million contracts traded in 2019.

The exchange first introduced a computer-assisted trading system on April 2, 1986. In 1993, the exchange launched the "Automatic Order Matching and Execution System" (AMS), which was replaced by the third generation system (AMS/3) in October 2000. Subsequently, On March 7, 2011, the exchange extended its hours in the first of two phases. The morning session then ran from 9:30 am to 12:00 noon, followed by a ninety-minute lunch break and an afternoon session from 1:30 pm to 4:00 pm. Index futures and options then began trading at 9:15 am, thirty minutes earlier, and closed at the same time as before, 4:15 pm. On March 5, 2012, the lunch break was cut to sixty minutes, with the afternoon session running from 1:00 pm to 4:00 pm.

It is perfectly normal for Hong Kong stocks, including those of global brands, to trade at prices less than HK$4 a share. A Hong Kong stock would not be considered penny stock unless its price is below HK$0.50. Additionally, each stock has its own individual board lot size. Purchases in amounts which are not multiples of the board lot size are performed in a separate "odd lot market."

There is a close-in-price rule for limit orders which must be within 24 ticks of the current price. Individual brokers may impose an even stricter rule. For instance, HSBC requires limit orders to be within 10 ticks of the current price. Broker support for triggered order types, such as market-if-touched orders, would allow placing orders further away. They would be sent to the exchange when the price condition was met.

The Securities and Futures Commission (SFC) is an independent statutory body responsible for regulating the market, safeguarding market integrity, enforcing securities and futures market legislation. Parties regulated by the SFC include HKEX and its subsidiaries (including the stock and futures exchanges and associated clearing houses), financial market intermediaries (securities dealers including exchange participants; sponsors; share registrars; fund managers; investment advisers) and investors.

The SFC’s regulatory objectives are as follows:

All companies seeking primary listing in Hong Kong regardless of their place of incorporation are subject to the Listing Rules, the SFC’s Codes on Takeovers and Mergers and Share Repurchases and other applicable regulations.

The Listing Rules apply as much to overseas companies listed in Hong Kong as to companies incorporated and listed in Hong Kong. Foreign companies may also be subject to additional requirements, modifications or exceptions set out in the Listing Rules.

On March 11, 2019, HKEX signed a license agreement with MSCI Inc. to introduce futures contracts on the MSCI China A Index, subject to regulatory approval and market conditions. The MSCI China A Index comprises the large and mid-cap portion of the A-share market accessible via Stock Connect and included in the MSCI Emerging Markets Index.