Published On: Tue, Aug 30th, 2011

Divisions Over Extending HK Futures Trading Hours

HKEx is planning to extend trading hours on the local futures market, but some of the city’s brokers are unhappy about it. Oswald Chen reports.

Hong Kong Exchanges & Clearing Ltd’s (HKEx) plan to extend the trading hours of the local futures market has triggered heated debates in the city’s financial market.

Meanwhile, HKEx has conducted a consultation on this matter, the results of which it is expected to announce next month. But although the outcome remains unknown, comments from industry players indicate that they are deeply divided over the issue.

“HKEx should be aware that cross-border and cross-time-zone trading among major bourses will become increasingly dominant. The local futures market should have more room for business development,” said Paul Lo, head of the representative office of European-based stock market operator Eurex Frankfurt AG.

“The HKEx should consider fine-tuning the necessary arrangements in the market infrastructure to facilitate futures market trading hour extension,” Lo added.

BMI Fund Management President Patrick Shum agrees.

“Extending the futures market trading hours can enhance market efficiency,” Shum said. “When the US stock market rises or falls in their day trading time (at night in Hong Kong) due to economic news and company announcements, the local futures market can respond instantly the same night. Local investors can then be better equipped to gauge the effects on the underlying Hang Seng Index cash market during the next trading day.”

“The extension is conducive for local retail and institutional investors to conduct normal hedging towards their investment portfolios and that can foster the in-depth market development of the local stock and futures market,” Shum said.

If the healthy development of the local futures market can be sustained, it might then be good for the HKEx to expand the capitalization of the local securities market.

“Having a robust futures market is essential to enlarging the total market value of any global stock exchange market,” according to Eurex Frankfurt AG’s Lo.

While stock market operators and fund managers generally supported the futures market trading hour extension to broaden the sophistication of the local futures market, local futures brokers are vehemently opposed to the HKEx proposal, citing that it may destabilize the local stock market.

“By extending the futures market trading session, the HKEx proposal will create a playing field that favors large institutional investors where they can easily manipulate trends in the futures market, not to mention that the proposal will add to the cost burden for local small and medium-sized brokers,” Hong Kong Securities & Futures Professionals Association Chairman David Wong told China Daily.

“As a result, the futures market will become more volatile and in turn will exert market pressure on the Hang Seng Index cash market during the next trading day if the futures market tumbles or soars during the previous night’s trading,” Wong added.

The association represents 2,700 individual finance professionals in the local brokerage industry, including dealers, brokers, fund managers, investment representatives and financial analysts.

HKEx published a consultation paper in late May seeking views on its proposal to introduce after-hours futures trading to strengthen Hong Kong’s derivatives market.

The bourse proposed that the trading of three futures contracts – Hang Seng Index futures, H-shares Index futures and gold futures – be extended by 30 minutes after the current market close (4:45 pm for index futures and 5:30 pm for gold futures) until 11:15 pm local time.

The HKEx reiterated that the futures market trading extension can help align the local bourse with the operation hours of other major global exchanges and to provide additional business opportunities for futures exchange participants and position Hong Kong’s derivatives market for future growth.

HKEx Head of Trading Calvin Tai said that after-hours futures trading would allow local investors to hedge or adjust their positions in response to market news and events in Hong Kong and overseas during the new trading session.

HKEx has unveiled a series of new measures to reform the local bourse’s market infrastructure so as to align with international practices. The last reform measure was to lengthen the trading session of the stock market from four hours to five hours in March of this year.

It said that the second phase of the stock market trading hour extension will be phased in from March 2012 with trading hours being further increased to 5.5 hours. (From 9:30 am to 12:00 pm before closing for a one-hour lunch break. The afternoon session will resume at 1:00 pm and continue till 4:00pm.)

However, finance academics warned that HKEx should consult the market fully as the proposal will not only affect stock market stability but that the interests of local retail investors could also be affected.

“The HKEx proposal may discriminate against local retail investors. If there is significant market movement in the futures night market that requires margin calls, retail investors may find it difficult to settle their positions through margin payments because banks are closed at night. Large institutional investors may have abundant financial resources to deal with margin financing calls,” Simon Lee, a senior instructor at the Chinese University of Hong Kong’s Faculty of Business Administration, told China Daily.

Lee also echoed David Wong’s views that the HKEx proposal may actually destabilize the local stock market. “The extension of the futures market trading hour to 11:15 pm local time without extending the underlying HSI cash market to the same period could cause volatility on the local stock market. This may not be fair to local retail investors,” he said.

“The HKEx proposal is mainly concerned at enhancing market turnover for the local bourse, but I think the stock market operator should have the full picture before enforcing the proposal. It should release more solid data and fully consult the opinions of more market participants in the consultation exercise,” Lee added.

The HKEx May consultation paper found that many futures brokers operating in Hong Kong are open in the evening to offer trading of European and US futures during London and New York trading hours. They include at least half of HKEx’s 183 Futures Exchange Participants. Together, that group of participants accounts for nearly 90 percent of Hang Seng Index futures turnover and nearly 95 percent of H-shares Index futures turnover.

It also found after-hours futures trading is now common among other leading derivatives exchanges, with eight of the top 10 derivatives exchanges in terms of stock index futures turnover offering after-hours trading. Turnover during after-hours trading in major derivatives exchanges ranges from 15 percent to 37 percent of turnover during each of their regular trading hours.

Source: China Daily

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