Hong Kong Stock Exchange: derivatives, ETF trading rise to offset slump in IPO, share markets, as 'diversification efforts pay off'

Hong Kong Exchanges and Clearing (HKEX), which runs Asia's third-largest stock market, reported strong growth in derivatives and ETF trading despite a big fall in new listings, in an indication that the bourse operator has successfully diversified its business model.

Total derivatives trading rose by 4 per cent this year as of November to 1.4 million contracts a day, HKEX said on Wednesday as it revealed its annual data. Driving growth is futures and options tracked by MSCI indexes, with several in the series having doubled their turnover in the first 11 months from the same period a year ago.

Hang Seng China Enterprises Index futures and options rose 55 per cent and Hang Seng Tech Index futures trading saw 31 per cent growth.

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Benchmark Hang Seng Index futures saw turnover drop 16 per cent but open interest rose 18 per cent. Its MSCI futures and options products saw open interest exceed 100,000 contracts for the first time in November, with a nominal value of US$4.2 billion.

Open interest is the total number of futures contracts held by traders at the end of the trading day. A large number indicates investors have a strong desire to keep the contracts, showing the depth of liquidity.

HKEX maintained its title as host to the world's most traded securities derivative and warrant markets, with total turnover of US$307.26 billion in the first 10 months of this year, much higher than the second placed Boerse Stuttgart on US$42.15 billion Euronext in third with US$23.87 billion, according to data from the World Federation of Exchanges.

"HKEX has made significant progress this year, despite a challenging macro backdrop," Nicolas Aguzin, the outgoing CEO, said in a statement. "Our derivatives market has performed very well and is now taking centre stage as HKEX's market diversification efforts pay off, supporting the strong financial performance of the group as reflected by the robust reported results during 2023."

HKEX also reported strong growth in exchange-traded funds (ETFs), with average daily turnover rising 20 per cent to HK$14 billion per day in the first 11 months of this year. In a significant development, the first Saudi Arabian ETF listed in the city on November 29, allowing investors to trade the biggest companies in the Middle Eastern country for the first time.

HKEX has introduced a host of trading products, ­including MSCI A-shares futures and ETFs since Aguzin took over in 2021.

This diversification has helped it fend off the weak performance of the stock market.

The average daily trading ­turnover of shares dropped 15.5 per cent year on year to HK$105.56 billion (US$13.53 billion) in the first 11 months. The exchange's main board, which has been the world's largest initial public offering (IPO) market seven times in the past 14 years, dropped substantially this year.

Hong Kong has hosted 64 new share listings as of December 15 this year, raising HK$40.9 billion, according to exchange data. The number of deals has dropped 34 per cent year on year, while proceeds from IPO have fallen 65 per cent to levels last seen 20 years ago.

Hong Kong slid to fifth in the global league table of IPOs, behind Shanghai, Shenzhen, Nasdaq, New York Stock Exchange. Last year, it ranked third, according to Refinitiv data.

"Our new overseas offices in New York and London, as well as our engagement programme in the Middle East and Southeast Asia, underscore our commitment to delivering on our international strategy," Aguzin said. "Over the past year, we have launched more connect-related initiatives and enhancements than in any of the previous eight years, strengthening Hong Kong's role as the 'superconnector' between China and the world."

The exchange added international companies to the Stock Connect scheme in March for mainland Chinese investors to trade in. French skincare company L'Occitane and US luggage maker Samsonite were among the first Hong Kong-listed overseas securities to be eligible for trading through the scheme.

HKEX also introduced the northbound leg of the Swap Connect scheme in May, giving global investors their first access to mainland China's interbank financial derivatives market to hedge the interest-rate risks of their 3.2 trillion yuan (US$460 billion) in Chinese bond holdings.

The London Metal Exchange (LME), a wholly owned subsidiary of HKEX, in November reported its highest average daily volume since May 2021. Open interest was up 17 per cent year on year.

"The introduction of new listing rules for specialist technology companies and the FINI platform are major milestones that will shape the future of capital markets in the region and beyond," Aguzin said.

The "Fast Interface for New Issuance" (FINI), launched in November will shorten the settlement cycle to two days from five, by digitalising Hong Kong's IPO settlement process.

"The exchange has been successful in developing more derivatives trading in recent years, which has helped the bourse to diversify its businesses," said Tom Chan Pak-lam, permanent honourable ­president of the Institute of Securities Dealers, an industry body for stockbrokers in the city.

"The expansion of the New York and London offices and the promotion in the Middle East and Southeast Asia also help to internationalise the local bourse, which is a positive move."

"However, the new business arising from the Middle East and other international markets is still in the initial stage. The increase of derivatives trading may not be able to fully compensate for the loss in stock trading.

"HKEX will still need to seek ways to boost new listings and stock market turnover."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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