Hong Kong: E-Commerce
Our earlier agreement with Hong Kong Exchanges and Clearing Ltd (HKEx) to ensure maximum availability and reliability of the local financial infrastructure. Ultimately it will facilitate the transformation toward a globally oriented Internet and e-commerce financial and securities industry."
Singaporean-based Fundsupermart.com has recently expanded its operations with the launch in Hong Kong of the online unit trust trading platform of iFAST Financial (HK) Limited. It is the company’s first investment in Greater China.
iFAST (HK) has been issued with Type 1 and Type 4 licenses for dealing and advisory services by the Hong Kong Securities and Futures Commission (SFC).
Speaking at the launch, Fundsupermart.com’s Managing Director in Hong Kong, Patrick Ho said he was confident that the new service would offer Hong Kong-based investors an easy and cost-effective way to research and build a unit trust investment portfolio.
There are a number of on-line banking operations directed at the consumer or the HNWI (high net worth individual) markets. In some cases a wide range of services is offered including share trading and investment.
Hong Kong banks were initially slow to equip themselves with Internet payment processing systems. The banks claimed to be uncomfortable about processing payments received from outside Hong Kong via the Internet because of the additional credit risk. Banks in Hong Kong charge about 2.5% for credit card payments but charges for payments received on the Internet shoot up to 4-10%.
The Postmaster General is authorized to be a Recognized Certification Authority under the Electronic Transactions Ordinance 2000. Additionally, the Secretary for Information Technology and Broadcasting may make regulations governing the procedures of certification authorities.
Since 1997, the Hong Kong Monetary Authority (HKMA) has been issuing a series of circulars to set out its regulatory approach on e-banking services and to provide authorised institutions with recommendations on the risk management for these activities. While institutions do not need to seek formal approval from the HKMA to offer their e-banking services, they should discuss their plans and risk management measures with the HKMA in advance.
Apart from share dealing services provided through banks' web-sites, there are a number of financial portals in Hong Kong offering share-dealing and investment services. Some global ecn's (electronic brokerages) also offer Hong Kong share trading, in one case from a Hong Kong-based operation (at the time of writing).
Hong Kong Exchanges and Clearing (HKEx) introduced AMS/3, a third generation automatic order matching and execution system, in late 2000. In February 2001 it added an Order Routing System (ORS). ORS is an open system that enables investors to place stock market orders through the Internet, mobile phones and other electronic channels, which may be developed by HKEx or vendors. After an order is placed through an electronic channel connected to ORS, the system automatically sends the order to a Stock Exchange Participant for approval and submission to the market for matching and execution.
More than 100 Stock Exchange Participants have so far connected to ORS, and are able to offer their clients Internet trading. All Stock Exchange Participants, including those who have connected to the HKEx channel, offer their clients electronic trading services, including Internet and mobile trading, through Proprietary Network System (PNS) channels provided by vendors.
CCASS provides settlement services under which securities are credited or debited to participants' CCASS stock accounts and funds are recorded in the participants' money ledgers on settlement day.
Details of all Exchange trades, including trade data and trade amendments, are electronically and automatically transmitted to CCASS by the Stock Exchange on each trading (T) day. There is no need for broker participants to input or further confirm their trade details in CCASS. Broker participants receive Provisional Clearing Statements of their stock and money positions through their CCASS terminals shortly after 1800 hours on each T day for reconciliation. Final Clearing Statements are available to broker participants shortly after 1400 hours on T+1 day for confirmation purposes.
In October 2010, HKEx published a paper to provide market participants with information about upgrades of AMS/3 and Market Data System (MDS). The upgrades, which are named AMS/3.8 and MDS/3.8 respectively, are scheduled for completion by the end of 2011. HKEx says they will increase the market's efficiency and transparency and pave the way for future growth.
"HKEx is committed to devoting its best effort and resources to the provision of high quality market infrastructure and services for the investing community," said HKEx Chief Executive Charles Li. “The AMS/3.8 and MDS/3.8 upgrades will play a crucial role in maintaining the competitive edge of Hong Kong’s securities market and helping us capture new growth opportunities.”
AMS/3.8 will essentially operate in the same way as the current version of the securities market trading system. However, the system upgrade will increase the processing capacity over the existing system by about 10-fold to 30,000 orders per second, and reduce average latency to 9 milliseconds, 16 times faster than present. Market transparency will also be improved as AMS/3.8 will display the 10 best price levels compared to the five best price levels in the current system. In addition, some legacy system functions will be streamlined to improve Exchange Participants’ operational efficiency.
Upon the rollout of MDS/3.8, throughput for market data dissemination will be increased to 2,000 stock page updates per second from 1,000 stock page updates per second, the message rate target that the existing system will use at the end of 2010. As a transitional arrangement, HKEx will disseminate market data at both message rates in the first year following the upgrade.
HKEx plans to introduce a new set of real-time market datafeed products about six to nine months after the rollout of MDS/3.8 to meet the increasing demand for deeper and faster market data. Market users will be provided with more data product choices and flexibility in choosing the market datafeed which best fits their needs and reception capability.
The Post-Dot Com Era
Generally, online securities trading in Hong Kong was an early casualty of the dot-com meltdown and the international equity slump, with a number of major US brokerages retreating from the SAR in 2001 almost as quickly as they had arrived in 1999 and 2000.
One exception was DBS TD Waterhouse, which in January, 2002, announced that it had launched an online brokerage operation in Hong Kong. "We have two partners with deep pockets who want to build the largest player in the Asian market," Chief Executive Officer Ian Struther explained at a news conference. "We are a long term player, and we feel we have the best business model."
Mr Struthers explained that the skill, experience, and knowledge of the retail brokerage market held by TD Waterhouse would help the new HK-based venture build a large customer base, and succeed where others have failed.
By 2003 it seemed that on-line trading would finally have its day in Hong Kong, as a combination of better technology, burgeoning interest from mainland visitors and the impact of SARS pushed on-line trading volumes to historic highs. Christina Hui Siu-wing, regional general manager for Asia at Charles Schwab Hong Kong, said that the company recorded its biggest trading volume in June that year since entering the local market in 1998. Schwab trades with its Asian customers only in US stocks, after being forced to abandon trading in local stocks in 2001, but says it has more than 300 Asian staff on its team. In 2002 Schwab recorded a 24% year-on-year increase in net new client assets and 12% growth in new account numbers. The firm said that Hong Kong investors are more active than those in the US, although only 10% of its Hong Kong customers could be classified as 'active traders' - those making more than 48 trades a year.
By mid-2004, however, on-line broking had grown to such an extent that the Hong Kong Association of Online Brokers, with 14 members, was urging the city's financial regulator, the Securities and Futures Commission, to strengthen internet registration procedures in an attempt to thwart fraudulent websites. The Association has proposed that all online brokerages must register under the internet domain name of sec.hk, making Hong Kong the first jurisdiction to adopt such a measure. The growth in the number of incidents of fraudsters attempting to trick investors by setting up fake websites threatened to undermine the Hong Kong public's confidence in online broking, the association warned.
The Hong Kong Internet Registration Corporation was reportedly working on a similar idea with the Hong Kong Monetary Authority. According to stock exchange data, the online trading of securities by retail investors had risen from 1.9% of retail trading volume to 8.5% in the previous four years.
Portware LLC, a leading independent provider of global, broker-neutral, multi-asset trading and strategy systems, announced in August 2007, the opening of its Hong Kong office to support its growing client base in the Asia-Pacific region.
Damian Bierman, formerly head of FIX Product Services at trading solutions provider NYFIX, in Hong Kong, was appointed to head up the Portware Hong Kong office and oversee day-to-day operations. The office focuses on implementation management and support, and is staffed by regional specialists and experienced project managers from Portware’s US headquarters.
Portware has seen a rapid growth in demand from buy- and sell-side firms for its easily deployed multi-asset trading and strategy systems. Portware’s flexible framework offers a full range of components from ready-to-trade systems through to customizable enterprise solutions, enabling financial institutions to quickly integrate execution management tools and manage complex trading strategies and risk in one place. Through a combination of Portware’s open Application Programming Interface (API), plug-and-play architecture and regional development support, Portware’s Asia-Pacific customers are able to achieve a high degree of localization, tailored specifically to the varied needs of the Asia-Pacific markets.
HKMA Announces Electronic Trading Platform
The Hong Kong Monetary Authority (HKMA) has announced the launch of the electronic trading platform (ETP) for Exchange Fund Bills and Notes (EFBNs), which commenced operation on December 11, 2007.
The ETP is designed to enhance price transparency among the market players, and streamlines the trading process. With the launch of the ETP, market players can identify their trade counterparties and conclude deals more efficiently. The ETP is designed to be flexible enough to allow it to be set up according to the specific requirements of individual market players.
"The launch of the ETP is an endeavour by the HKMA and the Treasury Markets Association (TMA) to encourage electronic bond trading, a practice which has increasingly been adopted by more advanced bond markets in the world," commented Eddie Yue, Deputy Chief Executive of the HKMA, and Chairman of the Executive Board of the TMA.
The launch of the ETP was one of the recommendations arising from the Review of Debt Market Development completed by the HKMA in late 2006. The ETP provides the necessary infrastructure to support electronic trading of other bonds in addition to EFBNs, and can be extended to cover other financial instruments available in the market. Besides market players in Hong Kong, overseas market players are also encouraged to use this platform when trading bonds and other financial instruments issued in Hong Kong.
The ETP was developed and is operated by Bloomberg LP, with advice on functional design and testing provided by a User Group established by the Treasury Markets Association (TMA).
Hong Kong As A Financial Internet Hub
Whatever Hong Kong does, major global ecn's (brokerages) will offer on-line trading in all important types of global security to Asian investors. They will offer both very low cost transactional services and also relationship-based services to HINWIs. The large retail financial services groups view Hong Kong as a high-potential market with local competition weakened and distracted by the region's recent economic and financial problems. The perception of global players at present is that Hong Kong is a market rather than a source of advanced Internet facilities, and it is not clear that the SAR is undertaking initiatives that might change this, bar the Cyberport.
Access to on-line services, which will grow in Hong Kong as it will in other advanced regions, will also facilitate a shift to foreign issues, composites, and derivatives, meaning that Hong Kong exchanges stand to lose significant volume to foreign markets unless local products fill these needs. Here again, a clear, local vision is needed that Hong Kong must compete in global terms by developing state-of-the-art products. It is unfortunate that the Growth Enterprise Market (GEM) has had a difficult birth; but at least it exists, and may yet develop into a regional focal point for high-tech issues and funds.
Finally, Hong Kong needs a sound legal and regulatory foundation for on-line banking and investment services. Its common-law inheritance is helpful, but the structure of markets and regulatory oversight needs rapid modernisation. Critical regulatory issues will include price competition, off-exchange transaction matching, and integration of securities markets with the banking sector. Among Hong Kong's competitors for regional Internet hegemony it seems that Singapore may be moving more quickly towards a transparent and unified financial structure.
Hong Kong's laissez-faire attitude towards commercial and financial development has stood it in good stead in the past, but it may be that Singapore's contrasting style, of top-down implementation of a grand vision, may be more appropriate at a time when models need to be changed very quickly.