China Stocks Link Offers Market-Tech Firms Opportunity

By Gregor Stuart Hunter 

Market-technology companies are finding opportunities as China prepares to link stock exchanges in Hong Kong and Shanghai.

The new Stock Connect program, to launch in October, will allow foreign investors to buy Shanghai-listed shares via Hong Kong, while granting mainland Chinese access to Hong Kong-listed equities.

Linking the exchanges and creating a seamless, secure trading environment will present technological and regulatory challenges, and brokerages and investors have expressed concerns to officials from both the Hong Kong and Shanghai exchanges about possible vulnerabilities.

Vendors of market software are ready to step in.

"It's actually a great opportunity for us," said Adena Friedman, co-president of Nasdaq OMX Group Inc., who is touring Asia Pacific this month. "We're there to work with the brokers and make them ready."

Nasdaq, which sells software in addition to operating its exchange in New York, has been advising Chinese banks and stock market operators on how to better monitor trading and ensure compliance with mainland regulations, she said.

Nasdaq counts Hong Kong's stock exchange and Securities and Futures Commission among its clients, and has expanded the services it offers in light of the new requirements of the trading link, Ms. Friedman said.

Market technology on the mainland will require some adjustments for brokerages and traders used to the cutting edge. Faxes are widely used to transmit buy and sell orders, for example, and the Shanghai exchange has no mechanism in place to monitor who might be ultimately buying or selling stocks traded by brokerages.

Trading rules under the Stock Connect program, many of which are already in place on the mainland, are "quite unique" and have created demand among brokerages, exchanges and regulators for market-surveillance software in both Hong Kong and China, said Ulf Carlsson, Nasdaq's general manager and head of North Asia and Japan.

The Shanghai exchange, for example, must confirm with brokerages each morning before trading begins that shares investors have indicated that they wish to sell that day are actually held in their accounts. Market rules also prevent brokerages from short-selling shares they haven't borrowed first, and engaging in day trading.

Hong Kong Exchanges and Clearing has previously said that it is exploring possible solutions to concerns identified by the industry but that they won't be fully resolved before the launch. A full market dress rehearsal took place last week and further tests will be done later this month.

Failure to fully address the technological issues around the link could cause some investors to stay away, said Tony Freeman, executive director of industry relations at Omgeo LLC. "If the mechanisms to process a transaction after it takes place are not effective or time lines are too tight, longer-term the impact may be a disappointing rise in liquidity," he said.

Omgeo anticipates that methods of processing trades in China--which because of its isolation haven't been integrated into global settlement cycles, and typically take less time than elsewhere in the world--will require additional investment by brokerages.

Other software providers report a surge in demand for trading products ahead of the opening of Chinese markets, which they expect to grow as further market liberalization occurs.

U.S.-based SunGard Data Systems Inc., which sells trading software to the financial services industry, said this week it had signed deals with five Hong Kong brokerages which will use its trading software to access Shanghai's market under the Stock Connect program.

SunGard "is seeing strong demand from our current client base and we are also getting a lot of enquiries from new customer prospects," said Paul McCartan, business development director for Asia Pacific. "As the Stock Connect scheme evolves and the market deregulates, this will lead to increased trading volumes, which results in greater needs in terms of products and services."

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