Connecting stock exchanges and global trading with China

HK Skyline

By Matthew Lempriere, Head of Asia Pacific at BSO Networks

Last month, BSO opened new offices in Hong Kong and Singapore, and I’m very excited to have joined the firm at this point in its journey to spearhead the Asia Pacific expansion.

It’s a great time to be joining, with the markets in Asia Pacific evolving so rapidly, and with so many opportunities opening up in the region.

One of the important developing areas is of course China.

Historically, the Chinese stock market has been a difficult market for Western investors to access. Equally, Chinese investors have faced a range of challenges when trying to access Western stock markets.

That situation is rapidly changing, particularly since MSCI added over 200 Chinese stocks to its emerging market indexes in May this year. One of the reasons MSCI finally granted approval for A-shares to be included in its indexes, was the improved market access that is now available, allowing non-nationals to buy and sell shares on the Shenzhen Stock Exchange for example.

Mutual market access

A key initiative in improving market access is the Shanghai-Hong Kong Stock Connect Programme, which was launched in November 2014 and the Shenzhen-Hong Kong Stock Connect Programme, which was launched in December 2016 (collectively, “Stock Connect”).

I spoke recently with Chris Lee, Senior Vice President, Global Client Development Department at Hong Kong Exchanges and Clearing Limited (“HKEX”), who explained that the Stock Connect provides investors in Hong Kong and qualified investors in mainland China to trade securities in each other’s stock markets – through the trading and clearing facilities of their home exchange.

To cite northbound trading as an example:  Overseas investors can access Shanghai Stock Exchange and Shenzhen Stock Exchange by sending an order to The Stock Exchange of Hong Kong (“SEHK”) via the eligible SEHK Participants. The SEHK then routes the order to the trading platform of the respective mainland stock markets.

This mutual market access mechanism has positioned Hong Kong as a gateway between the international and mainland China. This mechanism allows overseas and qualified mainland investors to trade eligible securities in each other’s markets in a relatively simplified way.

Chris said:

“Put simply eligible SEHK Participants can access about 85% of the Shanghai and Shenzhen markets (in terms of market cap as of July 2018)”.

As China’s markets open up, it means that if international investors want to take a stake in a Shanghai-based State-Owned Enterprises (“SOEs”), or one of the technology businesses – backed by “new money” – sprouting up in Shenzhen, China’s Silicon Valley, they can now do so.

Infrastructure

As a result, the market is experiencing significant growth as it opens up rapidly to a wide range of new investors and trading firms. To underpin this growth, HKEX has expanded its colocation and infrastructure facilities, aiming to become a ‘one stop shop’ for cash equity trading in the region. Chris said:

“Generally, investment firms around the world have been expressing a much greater interest in trading Chinese stocks since the MSCI inclusion”

To access these markets from their global locations, it is essential that they have the necessary connectivity in place, particularly from an electronic trading perspective.

In support of this market evolution, BSO has developed specialist infrastructure solutions. Our high-performance network, designed and built specifically for financial markets, provides ultra-low latency connectivity to HKEX for a growing number of firms around the world, now giving them the added ability to directly access liquidity in Chinese stocks.

The next growth opportunity

The latest key HKEX development is the introduction of weighted voting rights rules earlier this year. This makes HKEX an increasingly attractive listing proposition for companies and will undoubtedly lead to further significant growth.

Here at BSO, we are continuing to develop our relationships with exchanges such as the HKEX, and directly connecting European, US and APAC based trading firms into markets in response to new liquidity opportunities.  And with our expanded regional team, we will continue to enhance and support our services and effectively connect businesses.

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BSO Networks are a client of The Realization Group

This article was previously published here