Hong Kong Exchanges & Clearing (HKEx) has laid out details of an “urgent and necessary” strategic plan to allow it to compete with the emergence of local rivals, tackle competition from other global exchanges and survive future financial shocks.

The plan, described this week by Charles Li, chief executive, is a sign that HKEx has become the latest exchange in Asia to overhaul its business in response to emerging pressures of competition in share dealing, the growth of “high-frequency” trading and opportunities in derivatives thrown up by the post-crisis push to regulate over-the-counter derivatives markets.

It will be closely watched by HKEx’s global peers that have faced the same pressures and have been part of a wave of consolidation that has swept the sector in the past nine months.

HKEx is the world largest exchange operator, as measured by the group’s market capitalisation as a listed entity, but has stayed on the sidelines of consolidation so far. Its plan involves a series of reforms, which Mr Li said were needed to ensure HKEx’s survival during “rainy days”.

“Although Hong Kong’s financial markets have achieved extraordinary growth in the past decade, there are still a number of weaknesses and vulnerabilities, some of which could be fatal in the next crisis or could hamper [our] structural transformation,” Mr Li said. “Therefore, we need to remedy those weaknesses by kicking off market structure reforms now.”

Mr Li said that while HKEx continued to benefit as a listings centre for mainland Chinese companies and derived a large portion of its business from China, the “marginal benefit from new listings from the mainland has begun to fall given the already very large base of our market capitalisation”.

“Therefore, we need to explore new opportunities and start new chapters,” said Mr Li, a former JPMorgan banker and the first mainlander to run the exchange.

HKEx has aligned the opening time of its market to that of mainland Chinese markets, and plans to align the opening of the afternoon session in March next year. It also intends to extend opening hours of its futures market to capture more business from Europe.

It is building a data centre in Kowloon, in part to attract high-frequency traders, and has signalled its intention to launch clearing of OTC interest rate swaps.

Mr Li acknowledged that HKEx was facing “more and more intense competition both internally and externally” from alternative trading venues such as “dark pools” in Hong Kong.

“We will inevitably compete with our international peers as we execute on our strategy,” he added.

Mr Li said said the group needed to boost investment in IT infrastructure such as the data centre, and dismissed concerns over high-frequency trading.

“We do not agree with the view that enhancing our IT infrastructure favours high-frequency traders or the large brokers. Building the IT infrastructure is like building a highway; we should not abandon highway construction just because a few do not want to invest in new cars or a few fear accidents,” he said.

Mr Li said Hong Kong’s market framework, which includes stamp duty, “effectively limits high-frequency trading, just like a highway with many toll booths discourages speeding”.

“Besides, even if we don’t build the highway, we cannot prevent others from doing so and diverting liquidity, leading to market fragmentation,” he said.

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