Response to the HKEX Publishes Consultation Paper on Reduction of Minimum Spreads in the Hong Kong Securities Market
Release Date: 2024-09-18
September 18, 2024
To: Hong Kong Exchanges and Clearing Limited
Response to the HKEX Publishes Consultation Paper on Reduction of Minimum Spreads in the Hong Kong Securities Market
Question 1: Do you support the proposal to adjust the minimum tick size solely for specific securities, including stocks, real estate investment trusts, and equity warrants? If not, please elaborate.
Response: We concur with this proposal. Reducing the minimum tick size may lead to a dilution of buy and sell orders, resulting in fewer orders visible on the quotation screen. This could adversely affect visible liquidity, hinder price discovery, and potentially reduce trading interest among some investors. We appreciate the Hong Kong Stock Exchange's careful consideration of these factors in selecting specific stocks for adjustment rather than applying changes to all securities indiscriminately.
Question 2: Do you agree with retaining the current minimum tick size for price ranges below HKD 0.5 and above HKD 50? If not, please justify your position.
Response: We agree.
Question 3: Do you agree with the proposed price ranges and the extent of tick size reductions in Phase 1 (i.e., a 50% to 60% reduction for stocks priced between HKD 10 and HKD 50, achieving a tick size to price ratio of 4 to 10 basis points)? If not, please explain your reasoning.
Response: We agree.
Question 4: Do you support the proposed price ranges and/or the extent of tick size reductions in Phase 2 (i.e., a 50% reduction for stocks priced between HKD 0.5 and HKD 10, achieving a tick size to price ratio of 5 to 100 basis points)? If not, please provide your reasoning.
Response: We agree.
Question 5: Do you concur with maintaining the current single tick size table model that scales with price increases? If not, please explain your stance.
Response: We agree.
Question 6: Do you support the introduction of a multi-tick size table model for the same category of securities? If you agree, what criteria would you suggest for inclusion? If not, what challenges do you foresee with implementing this model? Please elaborate.
Response: We disagree. The market already lacks consistency, as each stock is differentiated by various factors, including the availability of stock options, stock futures, derivative warrants, and eligibility for short selling, among others. Implementing multiple tick size tables could exacerbate confusion rather than enhance clarity. We advocate for a uniform tick size table model for all securities to preserve a straightforward and cost-effective market structure within the Hong Kong stock market.
Question 7: Do you agree with the proposal to introduce a percentage-based requirement to the current tick size regulations for quoting rules, covering various trading sessions and transactions both within and outside the Exchange's trading system (i.e., referencing either 24 ticks apart or 3.5%, whichever is greater)? If not, please elaborate.
Response: We disagree. The current limit for order entry is set within ±24 ticks of the best order; however, as the minimum tick size decreases, the limit price for affected securities also narrows. Although the inclusion of a 3.5% allowance is proposed, it does not effectively restore the price limit range to its pre-reduction levels. For instance, a stock priced at HKD 0.5 originally had a maximum input price of HKD 0.74, but post-reduction, it drops to HKD 0.62, which does not meet the original upper limit even with a 3.5% allowance. Similarly, for a stock priced at HKD 5, the original minimum input price was HKD 4.76, which after the reduction becomes HKD 4.88, with a 3.5% allowance only reaching HKD 4.83, above the original lower limit. This proposal would narrow the input limit price, potentially diminishing trading efficiency and harming market activity. Therefore, we recommend increasing the input limit price for affected securities from ±24 ticks to ±48 ticks, which offers a clearer and more effective solution to the narrowing limit price issue. We believe adopting a ±48 tick size would be more manageable for practitioners and investors than the complexity of calculating an additional 3.5%.
Question 8: Have you observed any impacts on system infrastructure resulting from the reduction in minimum tick size, including arrangements for trading exchange-traded options in three decimal places? If so, please elaborate on these impacts and suggest the preparation time needed for additional system infrastructure changes.
Response: We recognize and understand the system adjustments and configurations that will be required due to this modification. It is essential that all changes are clearly communicated and that market participants are given sufficient preparation time.
Question 9: Do you agree with allowing the market six months for preparation before the new tick size table proposed in Phase 1 is implemented? If not, what do you consider an appropriate preparation period? Please explain.
Response: We agree.
Question 10: If the Exchange opts to proceed with Phase 2 after assessing the effectiveness of the Phase 1 tick size reduction, how much preparation time would you require?
Response: Less than three months.
For any further inquiries regarding this correspondence, please do not hesitate to contact me (Phone: / Email: ) or Mr. Thomas Ip, Council Member (Phone: / Email: ).
Wishing you good health,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association
To: Hong Kong Exchanges and Clearing Limited
Response to the HKEX Publishes Consultation Paper on Reduction of Minimum Spreads in the Hong Kong Securities Market
Question 1: Do you support the proposal to adjust the minimum tick size solely for specific securities, including stocks, real estate investment trusts, and equity warrants? If not, please elaborate.
Response: We concur with this proposal. Reducing the minimum tick size may lead to a dilution of buy and sell orders, resulting in fewer orders visible on the quotation screen. This could adversely affect visible liquidity, hinder price discovery, and potentially reduce trading interest among some investors. We appreciate the Hong Kong Stock Exchange's careful consideration of these factors in selecting specific stocks for adjustment rather than applying changes to all securities indiscriminately.
Question 2: Do you agree with retaining the current minimum tick size for price ranges below HKD 0.5 and above HKD 50? If not, please justify your position.
Response: We agree.
Question 3: Do you agree with the proposed price ranges and the extent of tick size reductions in Phase 1 (i.e., a 50% to 60% reduction for stocks priced between HKD 10 and HKD 50, achieving a tick size to price ratio of 4 to 10 basis points)? If not, please explain your reasoning.
Response: We agree.
Question 4: Do you support the proposed price ranges and/or the extent of tick size reductions in Phase 2 (i.e., a 50% reduction for stocks priced between HKD 0.5 and HKD 10, achieving a tick size to price ratio of 5 to 100 basis points)? If not, please provide your reasoning.
Response: We agree.
Question 5: Do you concur with maintaining the current single tick size table model that scales with price increases? If not, please explain your stance.
Response: We agree.
Question 6: Do you support the introduction of a multi-tick size table model for the same category of securities? If you agree, what criteria would you suggest for inclusion? If not, what challenges do you foresee with implementing this model? Please elaborate.
Response: We disagree. The market already lacks consistency, as each stock is differentiated by various factors, including the availability of stock options, stock futures, derivative warrants, and eligibility for short selling, among others. Implementing multiple tick size tables could exacerbate confusion rather than enhance clarity. We advocate for a uniform tick size table model for all securities to preserve a straightforward and cost-effective market structure within the Hong Kong stock market.
Question 7: Do you agree with the proposal to introduce a percentage-based requirement to the current tick size regulations for quoting rules, covering various trading sessions and transactions both within and outside the Exchange's trading system (i.e., referencing either 24 ticks apart or 3.5%, whichever is greater)? If not, please elaborate.
Response: We disagree. The current limit for order entry is set within ±24 ticks of the best order; however, as the minimum tick size decreases, the limit price for affected securities also narrows. Although the inclusion of a 3.5% allowance is proposed, it does not effectively restore the price limit range to its pre-reduction levels. For instance, a stock priced at HKD 0.5 originally had a maximum input price of HKD 0.74, but post-reduction, it drops to HKD 0.62, which does not meet the original upper limit even with a 3.5% allowance. Similarly, for a stock priced at HKD 5, the original minimum input price was HKD 4.76, which after the reduction becomes HKD 4.88, with a 3.5% allowance only reaching HKD 4.83, above the original lower limit. This proposal would narrow the input limit price, potentially diminishing trading efficiency and harming market activity. Therefore, we recommend increasing the input limit price for affected securities from ±24 ticks to ±48 ticks, which offers a clearer and more effective solution to the narrowing limit price issue. We believe adopting a ±48 tick size would be more manageable for practitioners and investors than the complexity of calculating an additional 3.5%.
Question 8: Have you observed any impacts on system infrastructure resulting from the reduction in minimum tick size, including arrangements for trading exchange-traded options in three decimal places? If so, please elaborate on these impacts and suggest the preparation time needed for additional system infrastructure changes.
Response: We recognize and understand the system adjustments and configurations that will be required due to this modification. It is essential that all changes are clearly communicated and that market participants are given sufficient preparation time.
Question 9: Do you agree with allowing the market six months for preparation before the new tick size table proposed in Phase 1 is implemented? If not, what do you consider an appropriate preparation period? Please explain.
Response: We agree.
Question 10: If the Exchange opts to proceed with Phase 2 after assessing the effectiveness of the Phase 1 tick size reduction, how much preparation time would you require?
Response: Less than three months.
For any further inquiries regarding this correspondence, please do not hesitate to contact me (Phone: / Email: ) or Mr. Thomas Ip, Council Member (Phone: / Email: ).
Wishing you good health,
Mofiz Chan
Chairman
Hong Kong Securities and Futures Professionals Association