Hong Kong Stock Exchange, a monopolized market

In just one century this institution became one of the world leading stock markets and within just one year it shifted from the world’s 8th to the 5th position. As of 2006 a total market capitalization of Hong Kong Stock Exchange, which is also known as the Stock Exchange of Hong Kong, accounted for more than HK$10 trillion (US$1.3 trillion). As of July 12, 2007 the Hong Kong Stock Exchange ranked fifth in the world with a total market capitalization of over US$2.124 trillion. Today the stock exchange is a part of Hong Kong Exchanges and Clearing Limited, a holding company that was formed in 6 March 2000 by a merger of The Stock Exchange of Hong Kong Limited (SEHK), Hong Kong Futures Exchange Limited (HKFE) and Hong Kong Securities Clearing Company Limited.

In 1891 the Association of Stockbrokers in Hong Kong was established. This was first formal stock market. The facts point out to that securities trading took place in Hong Kong in the middle of the 19th century as early as since 1861. The association became the Hong Kong Stock Exchange in 1914.

In 1921 a second stock exchange, the Hong Kong Stockbrokers' Association, appeared. The Hong Kong Stock Exchange was predominantly the main exchange for Hong Kong despite co-existing with other exchanges. In 1947 the Hong Kong Stockbrokers' Association merged with the Hong Kong Stock Exchange and re-established the stock market.

In the course of further development of the national economy three new exchanges emerged on the stage: Far East Exchange in 1969; Kam Ngan Stock Exchange in 1971; and Kowloon Stock Exchange in 1972.

In light of the market crash in 1973 as well as the need in strengthening market management the Hong Kong government set up a working party in 1977 to consider the unification of the four stock exchanges. This led to the incorporation of the Stock Exchange of Hong Kong Ltd. in 1980. The four separate exchanges ceased business on 27 March 1986 and the new exchange started trading through a computer-assisted system.

Computers were integrated on 2 April 1986, which has helped modernize the system. In 1993 the exchange launched the "Automatic Order Matching and Execution System" (AMS) that was replaced by the third generation system (AMS/3) in October 2000. Systems as such were added to meet the increased popularity of online Stock trading.

A complete reform of the SEHK was initiated after the October crash in 1987. At that time a new more qualified and competent Council was established and a strong, professional executive management team was recruited.

In 1999 the Growth Enterprise Market (GEM) was included into the Stock Exchange of Hong Kong. Some sources note that the impact of the move was insignificant because of the dotcom crash in 2000. The GEM was meant for assisting smaller and high growth companies. The institution was expected to help broaden the overall market.

On March 3, 1999 the Financial Secretary of the Hong Kong SAR Government announced in his Budget Speech about a comprehensive market reform for the securities and futures market. This reform led to that SEHK and Hong Kong Futures Exchange Limited (HKFE) were demutualized and on March 6, 2000 they merged with the Hong Kong Securities Clearing Company Limited (HKSCC) to form a single holding company - Hong Kong Exchanges and Clearing Limited (HKEx).

Hong Kong Exchanges and Clearing Ltd (HKEx) HKEx listed itself on SEHK on 27 June 2000, thus becoming the world’s second bourse to go public. In accordance with the Schemes of Arrangements of the exchanges and the Exchanges and Clearing Houses (Merger) Ordinance dated March 6, 2000 HKEx is the holding company of the Stock Exchange of Hong Kong Ltd, the Hong Kong Futures Exchange Ltd and Hong Kong Securities Clearing Company Ltd.

In 2002 the HKEx proposed to cancel listings of companies trading below HK$0.50 which hit penny stocks hard for 30 days. Shares of 17 companies had their value decreased by over 30% with HK$6 billion in market capitalization was wiped off 105 listed companies. The move of delisting these companies was explained by the little revenue generated for the exchange while a significant part of staff resources were required to address their shares.

David Webb, independent non-executive director of the Exchange since 2003, has been arguing for a super regulatory authority as there is inherent conflict between its commercial and regulatory roles. He called on the regulatory role to be passed to the SFC.

In early autumn 2007 the Hong Kong government reported that it had increased its stake in the exchange from 4.41% to 5.88%. The Government spent HK$2.44 billion to buy 15.72 million shares in the company. A series of critical remarks from local and foreign observers followed the government’s move. The government became the second largest single investor in the Hong Kong market with Beijing being the first. David Webb noted that the purchase violated the government's stated principle of "big market, small government", adding that it increased uncertainty and sends a very negative signal to the market as a whole. Financial commentator Jake van der Kamp noted the Financial Secretary's conundrum: The government is faced with a conflict of interest, as its desire for an efficient marketplace is contrary to its desire as a shareholder, who would prefer to maximise returns.

The government in turn explained that its aim is to play a positive role in the further development of the stock exchange. Some experts believe that the government will be increasing its stakes even more inasmuch as HKEx is being prepared "for future integration and alliance with mainland exchanges".

Today the Stock Exchange of Hong Kong is the third largest stock exchange in Asia by market capitalization after the Tokyo Stock Exchange and the Shanghai Stock Exchange which occupy the first and the second places respectively. As of December 2007 the Hong Kong Stock Exchange had 1,241 listed companies with a combined market capitalization of $2.7 trillion.

The Hong Kong Stock Exchange has some peculiar features that differentiate it form its counterparts in the U.S. such as NYSE and NASDAQ.

First is the time zone that determines the trading day in the SEHK. The day is divided into a morning and an afternoon session, with a two-hour lunch break in between. The morning session is from 10:00 am to 12:30 pm and the afternoon session is from 2:30 pm to 4:00 pm. As long as Hong Kong has not daylight saving time the time in summer differs from that in winter. Thus in summer the start of trading is at 10:00 pm, but in winter it is at 9:00 pm.

Second is that in the HKES the level of the threshold price is lower. In the U.S. exchanges a stock trading at less than $5 may require a reverse stock split while in Hong Kong it is not unusual when the stocks of even well-known companies are traded at prices less than 50 U.S. cents per share. A stock in the Hong Kong Stock Exchange is considered a penny stock only when its price is lower HK$ 0.50 (nearly 6.5 U.S. cents).

The standard lot size in New York is 100 shares and investors often are able to buy odd lots at that. In the HKSE each stock has its own individual board lot size (an online broker will usually display this along with the stock price when you get a quote), and it may not be possible to buy in other than multiples of the board lot size.

One more different feature in the Stock Exchange of Hong Kong is that there is a close-in-price rule applied to the limit orders and it must be within only 24 ticks of the current price. Moreover, individual brokers are able to impose an even stricter rule. HSBC is a typical example. The bank requires limit orders to be within 10 ticks of the current price. Thereby in Hong Kong you cannot exploit volatility by placing a lowball limit order in the hope that it might be hit before the end of a trading session.

And the last is that broker commissions are generally higher in Hong Kong. In the U.S. investors can often trade for a flat fee of less than $10 through an online broker while for Hong Kong trading this might be approximately the equivalent of US$ 35, although this may vary between different brokers. Recently, Interactive Brokers LLC has entered the HK Brokerage market with a minimum brokerage commission of only HK18 (~US$ 2.3).

Daily changes of the 33 largest companies in the Hong Kong Stock Exchange are reflected in the Hang Seng Index. It is the main indicator of the overall market performance in Hong Kong. The companies recorded in the index represent roughly 70% of capitalization of the Hong Kong Stock Exchange.

The largest listed company on the Hong Kong Stock Exchange Hang Seng Index is HSBC Holdings plc which is actually over 30% of the value of the Hang Seng.