The Misconception of Market Competitiveness by Ronald Arculli
February 2, 2012.
Ronald Arculli, do you truly grasp the concept of market competitiveness? As the Chairman of the Hong Kong Stock Exchange for an extended period, it is crucial for you to reflect on whether you are merely occupying your position without addressing the developmental needs of the Hong Kong stock market. Your definition of market competitiveness appears to be riddled with misconceptions, where "insiders thrive while outsiders suffer."
The Hong Kong Stock Exchange, through its consultations and board resolutions, is unilaterally pushing forward with the second phase of extended trading hours this March, despite significant opposition from the industry. Arculli justifies this action as a means of "enhancing market competitiveness for Hong Kong stocks," arguing that Hong Kong's trading hours are the shortest among international markets, thus necessitating an extension. Such misleading rhetoric is utterly unacceptable and calls into question whether, over the last two decades, Arculli has merely been a figurehead, disconnected from the realities of Hong Kong's stock market.
Do you truly understand what constitutes a market, what competitiveness entails, and what market competitiveness for Hong Kong stocks involves? Allow me, as an industry insider, to provide some clarity.
The securities investment market is categorized into mainstream and non-mainstream segments. Mainstream markets refer to traditional fund trading venues that prioritize market quality, advocating for a fair, open, and equitable environment. Consequently, stability, accurate information, prompt credit assessments, and transparency are paramount. Investors in mainstream markets typically engage in long-term investment strategies rather than short-term speculation. In contrast, non-mainstream markets, characterized by unverified news that leads to significant short-term fluctuations, enable speculators to profit from these rapid movements, particularly hedge funds and various derivative instruments, which indeed contribute to heightened market activity.
Hong Kong has successfully cultivated a prominent non-mainstream market, with our structured products market recognized as the largest globally for years. However, this success has come at a significant cost to the overall securities market. Should the non-mainstream market overshadow the mainstream, the original listed companies may be relegated to mere instruments for manipulating structured product prices, severing the link between stock performance and the quality of the companies or industry shifts. This detachment results in a lack of attention to company performance; firms without structured products may be overlooked, akin to third- or fourth-tier stocks, lost amidst the vast array of listings. Isn't this indicative of flawed market development by the Exchange, adversely impacting listed companies? Stock prices are irrationally depressed by derivatives, depriving legitimate investors of the returns they rightly deserve.
Arculli asserts that Hong Kong possesses the shortest trading hours among international markets. On what basis do you arrive at this conclusion? Presently, Hong Kong's trading hours span five hours (or five and a half when including the auction period). In Asia, Japan (which Arculli cannot dismiss as a non-international market) operates for four and a half hours, as does Taiwan, while our primary source of market funds, China, has trading hours of only four hours. How, then, can we truly claim to have the shortest trading hours? Arculli, as the Chairman of the Hong Kong Stock Exchange, how can you make such unfounded statements without a hint of embarrassment?
Reducing brokers' lunch breaks to extend trading hours raises concerns about brokers' ability to interact with clients during this time to address their needs. Furthermore, the Exchange’s superficial consultations and disregard for industry interests in its decision-making processes are alarming. When you eventually step down, do not presume that accountability will evaporate with your departure. History will remember this, and you must be held responsible for your actions that neglect the interests of countless brokers.
Reflecting on the implementation of the first phase of extended trading hours last year, industry insiders have voiced their grievances, and trading volumes in Hong Kong have declined. Why has the Hong Kong Stock Exchange not conducted a thorough review of this situation? Is the strategy of extending trading hours flawed? If trading volume is unrelated to trading hours, why does the Exchange persist in extending them, thereby increasing operational costs and risks for the industry? Implementing the second phase of trading hours without a comprehensive review of existing policies seems reckless. Where is the genuine consultation from the Hong Kong Stock Exchange?
The Board of the Hong Kong Stock Exchange approved the decision to "extend trading hours" with only two dissenting votes. Notably, there are merely two industry representatives on the Board, and those votes came from the industry representatives themselves. Doesn’t this clearly signal to the Exchange’s directors that we, the securities brokers, oppose the extension of trading hours? We are practitioners in this field, and the Exchange’s products rely on our ability to market them. Our relationship with the Exchange is one of mutual dependence, not subservience. Hong Kong Stock Exchange and Arculli, please do not undermine us. Extending trading hours is certainly not an effective means of enhancing market competitiveness.
So, what constitutes true market competitiveness?
Genuine market competitiveness involves "self-awareness, enhancing self-value, creating unique market capabilities, and addressing the real needs of the market," rather than blindly adopting the developmental paths dictated by others.
Acknowledging Hong Kong's unique context, supported by the mainland, with the country providing robust backing, is a frequent refrain among speakers. However, having strong support also necessitates knowing how to leverage it; otherwise, it resembles a second-generation heir squandering the family fortune, ultimately depleting the assets amassed by predecessors. Thus, with the mainland’s support, an improved legal framework, and well-established international trade and communication networks, Hong Kong possesses valuable assets cultivated over the past century. Since the introduction of mainland enterprises listing in Hong Kong, it has diversified investment opportunities in our local securities market, moving beyond the historical focus on “real estate stocks” and enabling the Hong Kong stock market to genuinely evolve into an international marketplace in both scale and substance.
Enhancing self-value cannot be accomplished simply by extending trading hours, forcing brokers to remain tethered to their phones or computers in anticipation of client trades. It is the broker's duty to understand the interconnectedness of various financial instruments, market structures, and client needs while providing professional guidance. Brokers should utilize their lunch breaks more effectively to engage with clients, addressing diverse investment inquiries without infringing upon clients’ working hours.
As Europe and America grapple with financial challenges that threaten to plunge the entire world into a crisis, one must consider: what investment havens remain viable for traditional funds? Observing foreign finance ministers, beleaguered by financial dilemmas, seeking refuge in China underscores the direction of traditional market funds. Yet, the directors of the Hong Kong Stock Exchange seem oblivious to the opportunity to leverage Hong Kong’s unique advantages of "stable political, economic, and social investment environments" to attract substantial investments, instead squandering energy on extending trading hours—a mere superficial solution. Why must we stubbornly conform to the trajectories of other markets, forcibly aligning Hong Kong with international counterparts? If one market falters, Hong Kong stocks may face collateral damage from the ripple effects of foreign markets. Extending trading hours to synchronize with international markets is unquestionably an instance of “bad money driving out good.”
Wong Kwok-on David
Chairman
Hong Kong Securities and Futures Professionals Association