Hong Kong Stock Exchange has enhanced market making in ETPs to boost liquidity

Deborah Fuhr Welcome to ETF TV, I’m Deborah Fuhr from ETF TV and ETFGI. Today, we’re going to be discussing a number of changes that the Hong Kong Stock Exchange has been making to facilitate an improvement in market liquidity and improvements for investors and ETF issuers, both locally and globally. We’re joined today by Brian Roberts, the head of ETPs at the Hong Kong Stock Exchange. Welcome, Brian.

Brian Roberts Thank you for having me. It’s a pleasure being here today.

Deborah Fuhr So I thought maybe you could tell us a little bit about what is the landscape of ETFs out in Hong Kong?

Brian Roberts Yeah, last year we celebrated the 20th anniversary of ETFs in Hong Kong with the first listing of the tracker fund. Today we have over 130 ETFs listed on the Hong Kong Stock Exchange, with about 40 billion US dollars of assets really covering a diverse set of exposures. And over the past couple of years, we have really seen Hong Kong quickly accelerate and really becoming the marketplace for investors in Asia to really access the world’s equity, fixed income, and commodity markets, through ETFs without having to leave the Asian timezone.

Deborah Fuhr Can you talk a little bit about the types of investors that are using ETFs and how they’re using them?

Brian Roberts In Hong Kong or just in Asia more broadly speaking, we’re predominantly an institutional market, so we’re seeing a lot of adoption of ETFs within pensions insurance side. But we’re also starting to see, especially in the past 12-18 months, more intermediated investors, private wealth management, clients starting to use ETFs more. And then most recently, we really have started to see individual investors really starting to adopt ETFs. And there’s a survey that we do here in Hong Kong about every three years; where we saw retail investors more than double their exposure to ETFs just in the past three years. Roughly about 10% were using ETFs three years ago. Now, we’ve seen that’s a little bit above 20% usage. So, again, I think we’re starting to really see the usage of ETFs just quickly expand across all the different channels here in Asia. I think within the institutional channels, we’re starting to see more strategic allocations to ETFs. But as you kind of move down into the retail segment, we are really seeing ETFs being used as a way to implement tactical market use or market sentiments.

Deborah Fuhr You’ve made a number of market structure changes over the past nine months. Can you help us understand what you’ve done and how they’re changing the way investors are using ETFs?

Brian Roberts This has been a big focus for us, because we really, from an ETF market standpoint, we compete in a global market. And so for us, it’s really about how do we lower the total cost of investing for ETFs. And one of those ways that we can really kind of influence that is about how we can bring down trading costs, because that’s obviously an important element for investors, from institutions down to retail. So we really have had a very diligent process over the past 18 months in terms of how do we really kind of transform the overall market structure for investors. And a lot of that is focusing on the supply of liquidity into the market. So what we have done is, we have provided market makers with the ability to have delayed settlement in their secondary market positions, to be able to be more aggressive in their order books, provide more quoted value on screen. And also be able to provide tighter quotes because now they can actually quote aggressively all the way through market closed.

Recently, we introduced a new spread table for the ETF market and roughly about 80% of ETFs listed on HKX, we have seen spreads compress and in some of the specialty, some of the more popular, more traded ETFs, we’ve seen the spreads compress by more than 60%. And so fx, Tracker Fund 2800, which is probably one of our most traded ETFs, used to trade around 17-18 basis points wide. Now it’s trading about 8-9 basis points. So just by simply changing the spread table, that kind of governance spreads for market makers, we were able to significantly reduce the trading spreads for investors.

Deborah Fuhr Soon you’re going to be introducing some changes to the stamp duty on creations of ETFs. Can you talk a little bit about that?

Brian Roberts So this is all part of lowering the trading cost for investors and really kind of, again, focusing on the supply of liquidity. So what we’re going to be doing, and this has been something that we’ve been working with the Hong Kong government on, is providing market makers with a stamp duty waiver, when they create and redeem ETF shares with the ETF issuers. This will go into effect on the 1st of August and what it will do, it will kind of range. But if you’re looking at a product, even like a Tracker Fund, or some of the 100% Hong Kong equity ETFs trading on HKX, that’s going to result in 10 basis points of saving through the creation redemption process. And this will also impact ETFs that just have Hong Kong as a component in their strategy. So if you think about an MSCI or a FOOTSIE emerging market ETF, roughly about 20-25% of that exposure is listed in Hong Kong. So that would result in about two to three basis points worth of savings in the creation redemption process. When you’re trading Asian underlying baskets, Hong Kong is going to be the most cost efficient place for investors to do that.

Deborah Fuhr Well, thank you for sharing all those updates with us. That is really exciting to see. So I’d like to thank Brian, for joining us today.

Brian Roberts Thank you, Debbie. Thank you.

Deborah Fuhr And I’d like to thank you our viewers, for watching this episode of ETF TV. For more episodes, go to ETFTV.NET. Thank you and see you soon.

Published on July 7, 2020