Should HKEX extend trading hours to stay competitive?

Trading US stocks have long been a popular investment avenue for Hong Kong individual punters, and when one says “I’m staying up late tonight” one is often greeted by “To trade the market?”, Obviously the exchange operators in the US are eyeing the potential of tapping the increasingly affluent Asian investors in their own time zones, with the New York Stock Exchange (NYSE) reported to be looking into extending its trading hours (see here), with only 2 hours of rest between sessions (bottom bar below):

Figure 1: NYSE and LSE proposals to extend their trading hours

Not to be outdone by their peers across the pond, the London Stock Exchange (LSE) is now also reported (see here) to be studying how they could extend their offering – to an even more ambitious round-the-clock service (second bar above)!

Global markets call for 24-hour availability?

With stock investing going global in the age of easy data feeds and online trading platforms, the need to be able to access your target markets can only rise. Let us look at the current set up across major exchanges in each time zone:

Figure 2: trading hour distribution of major stock exchanges around the globe

Asians – mostly localised services

Represented by the red areas above, it is clear that most Asian stock markets cater only to their local investors, with all of opening after 9am and closing by 5pm local time. What is more, they are the only markets with long lunch breaks (up to 2 hours, yellow area above).

There is also a convenient trading overlap with major European exchanges except Australia Stock Exchange (ASX) and Tokyo Stock Exchange (JPX) which start earlier than the rest of the pack.

Europeans – geographically lucky to straddle

In the EMEA (Europe, Middle East, Africa) time zone (represented by green areas) the most diligent are the Germans, with Frankfurt Stock Exchange (FRA) boasting the longest trading hours and basically out-trades every competitor in its region; what is more, its trading hours also completely envelope the US major bourses too! This is followed by Dubai Exchange (DFM), which despite being 4 hours ahead of London, tries to grab business by starting an hour ahead of the London Stock Exchange (LSE) and closes one hour afterwards.

The favourable location of Europe allows these exchanges to overlap with Asian exchange at the start of the day and then again segue into the American exchanges before they shut up shop, thus serving a crucial bridging function in providing market continuity over the day.

Now that we have a basic understanding of the trading hour distributions, it is not hard to see why LSE is proposing – to extend its own time advantage to cover the entire world (light green area)!

Americans – biggest need to extend trading hours

Given how overwhelmingly dominant the US stock markets are – the two US exchanges are home to $49trn worth of market capitalisation, more than all the other above exchanges combined at only $45trn, and value traded totalling $50trn compared to $48trn for the rest (above all 2023 figures) – there is probably far greater practical benefit to extending the US trading hours.

What do the numbers say about lengthening trading hours?

In theory, the longer the trading session, the higher should an exchange’s volume-to-market-cap ratio be. Below is a plot of all exchanges in our study:

Chart 1: Vol / Mkt Cap vs Hours Traded

There does not seem to be any correlation at all it seems:

a)     the two biggies (NYSE + NASDAQ, marked by a horizontal blue line) top the volume/market cap metric amongst all open capital account markets, despite their shorter trading hours;

b)     the two Chinese exchanges Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE) have disproportionately high volume relative to their listed market caps, all while having the shortest trading hours!

Besides capital controls (which trap liquidity), we also suspect that lack of investment alternatives and high retail participation are the drivers of such high trading velocity for the Chinese exchanges:

 

Chart 2: Vol / Mkt Cap vs Retail Participation

The chart above seems to prove our suspicion – with significantly higher retail stock investing (in the 80%s), the PRC exchanges corroborate the trend line of higher retail = higher volume/market cap.

If we take out the PRC exchanges, then we get a tighter new pattern (Chart 3), where 5 to 7 hours seem to be the norm for most jurisdictions, with a large volume/market cap spread between the high teens through to over 100%:

Chart 3: Vol / Mkt Cap vs Hours Traded (Excluding SSE & SZSE)

One big disappointment is that of LSE, which despite having longer trading hours, features badly in its trading efficiency. This suggests that there are other structural issues at play – could it be low valuations which put off potential listing candidates, or is it over-enthusiastic regulation making life difficult for existing candidates? After all, what this also points to is the fact that stock exchanges are in a global competitive race for members, and extending trading hours is but one of many factors that will make or break an exchange’s future prospects.

 

Hong Kong – extend and upgrade

What does all of these leave HK? We can discern a number of actions that will help the city:

a)     as always deregulation and limiting the over-protective interference of the SFC will definitely attract more listings and trading volume;

b)    policy help from mainland China certainly helps – including all the redomiciling of PRC listcos to HK given heightened geopolitical risks, a trend we see continuing for a number of years ahead;

c)     and of course, longer trading hours, including even scrapping the lunch break - this is now almost unavoidable given the biggest to competitors are both studying similar strategies, HK should not be left behind.

 

All of these measures will help prepare for the day when HKEX’s stature approaches that of the American exchanges, when overseas traders would appreciate the convenience of trading HK stocks any time they want, and not having to get out of bed in the middle of the night to do.

 

The author would like to thank Tang Kwan Po Aaron from The Chinese University of Hong Kong majoring in System Engineering and Engineering Management for assisting in data collection and analysis of this article.