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."
Subscribe to WSJ: http://online.wsj.com?mod=djnwires