Five Hong Kong Brokers Spearhead Fidessa’s ‘China Connect’ Link

Fidessa Group Plc., has announced that five Hong Kong-based brokers will be the first participants in a new technological venture linking stock markets on the Chinese mainland with their counterparts in Hong Kong. The brokers cited so far are ICBC International Securities Limited and Standard Chartered Securities (HK) Limited, with more likely to follow once the link is tested and launched later this year.

The link, dubbed ‘China Connect,’ is expected to go live sometime in October with functionality and stress testing to go ahead prior to the final launch. When fully operational, ‘China Connect’ will provide offshore investors with access to mainland China via the Hong Kong market, while mainland China-based investors will be able to access shares listed in Hong Kong via the Shanghai market. Overall, the venture is expected to create a combined market capitalization of $5.5 Trillion, according to data obtained from the World Federation of Exchanges (WFE). At present, the only overseas buyers who can invest directly into China's domestic markets are large institutional investment firms that have secured a quota from the government under China's QFII program.

Excited investors shouldn’t get too excited just yet. Some constraints, including quotas, holiday arrangements and trading restrictions will remain in place when the scheme finally gets launched in order to create a smooth transition with as few problems as possible. The gradual, soft approach reflects China’s insistence on liberalizing their markets slowly and sustainably. Access to the Chinese yuan currency is going through a similar gradual liberalization rather than a blanket lifting of restrictions overnight.

Testing Phase

Between August 11th and September 5th, 2014, securities brokers on the Chinese mainland will make simulated investments in 14 selected stocks listed on the Hong Kong Exchange. The tests will involve regular stock trading, clearing, trading suspension and adaptation tests. The Hong Kong Stock Exchange will then conduct tests for investing in Shanghai between August 23rd and September 13th. David Jenkins, Head of Product Marketing at Fidessa, was quoted as saying: "Implementing this link successfully involves additional technology infrastructure, as well as new tools and processes right across the front, middle and back office."

It would appear that Fidessa is committed to this unique venture which has included a large amount of development work and customer consultations. According to Jenkins, this involved designing the right algorithms to cater for the wider spreads, transient Liquidity and Volatility associated with trading the Shanghai market.

The direct link is likely to lead to faster execution times and reduced trading costs which should be beneficial to investors both in Hong Kong and China. The aim is to achieve greater facilitation of cross-border flows between the two regions. However, some Asian exchanges have expressed concern at the proposed link between Shanghai and Hong Kong on the grounds that the link will divert foreign capital away from other developing Asian exchanges and concentrate most trading activity in China.

On a broader note, the ‘China Connect’ link is a practical test of how closely China and Hong Kong can collaborate given the arduous history the two regions share. China’s drive to reform and liberalize continues, albeit at a snail’s pace.