Hong Kong Typhoon Trading Halts Sail Into The Sunset

Key Takeaways:

• A new rule that will keep Hong Kong’s stock market open through bad weather events will take effect on Sept. 23
• Analysts believe the measure will have limited impact on trading volumes, and say other measures like lowering trading-related taxes will do more to attract investors

By Fai Pui

The evening of Sept. 5 was a momentous one for Hong Kong, as Super Typhoon Yagi made a near direct hit on the city. The storm continued to soak the metropolis the next day before easing after noon, when the city’s weather agency finally lifted its severe weather alert. But that was too late for the Hong Kong Stock Exchange, which was forced to remain shut the entire day under rules adopted by its operator, Hong Kong Exchanges and Clearing Ltd. HKXCF.

As chance would have it, a regular quarterly adjustment to the benchmark Hang Seng Index was set to take place that day but had to be postponed until the next trading day.

The reality is that typhoons are a regular menace to Hong Kong during the summer months, and Yagi is hardly the first super typhoon to hit the city. But its arrival was momentous nonetheless, as it marked the last time the Hong Kong Stock Exchange will close for a typhoon day, a sort of equivalent of a snow day in many Western countries.

Starting Sept. 23, or next Monday, a new rule will take effect that keeps the market open even during severe weather events like typhoons, putting Hong Kong more in-line with international practice.

Hong Kong is currently the world’s only major exchange that closes for bad weather. That contrasts with all the world’s other major exchanges that stay open during bad weather, natural disasters and other unpredictable events, including Shanghai and Shenzhen in China, the New York Stock Exchange and Nasdaq in the U.S., and exchanges in Tokyo and New Delhi. Hong Kong’s quirky rule dates back to a time when most trading was conducted in-person, and often upsets investors who mock their exchange as a place for “open-air trading”.

The city’s Chief Executive John Lee announced the Sept. 23 launch date for the new rule back in June, noting that as an international financial center the city was obliged to take such a step to conform with global standards. The fact that most trades are now done electronically also makes the need to halt trading through bad weather events largely obsolete, he added.

Lee said the new rule would boost the exchange’s competitiveness and enhance Hong Kong’s role as a bridge between international and Mainland Chinese stock markets.

Bad weather has forced daylong trading suspensions 12 times in Hong Kong since 2018, including four days last year. The exchange’s 2023 financial report shows an average of HK$93.2 billion ($12 billion) in equity-type securities traded hands on a typical day that year, implying HK$279.6 billion in lost trading volume for the exchange from three full-day closures.

Major brokerages are ready to welcome the new rule. Edmond Hui, CEO of Bright Smart Securities (1428.HK), said his employees could do their jobs normally throughout storm events, drawing on infrastructure installed during the pandemic enabling people to work from home, as well as the round-the-clock availability of global futures trading services.

Market Is Ready

According to a news release last week, the Hong Kong exchange has completed test runs for keeping the market open in bad weather and more than 99.9% of market participants are ready for the change. By Sept. 10, only four small- and medium-sized participants were not fully prepared.

Curtis Yeung, a strategist at UOB Kay Hian (Hong Kong), said maintaining trading through bad weather will help lift annual trading volumes, but only marginally. “The past seven years saw a total of only 12 times of market closure, each on average lasting less than two days, and the shutdown only caused trades to be delayed to the first reopening day rather than cancellation of trades,” he pointed out.

Yeung suggested the new rule will more importantly improve access to Hong Kong stocks to make them available for regional and global traders. “Hong Kong is a world-leading financial center used by many investors from different parts of the world. Under the old system, something like a small-scale market rout in Japan or other Asian Pacific market might lead investors to try to take arbitrage positions in Hong Kong, only to find the market shut if a typhoon was passing through.”

Kenny Wen, head of investment strategy at KGI Asia, agreed the new rule would have only limited impact on overall trading volumes. “Investors can always wait until the second day to buy. What they care about more is value. Activity is lacking in Hong Kong now mostly because of China’s weaker-than-expected post-pandemic recovery. That, compounded by the plunge of tech stocks amid regulatory tightening, has sapped investor confidence.”

Wen also pointed out that the Hong Kong stock market failed to benefit from the AI frenzy of the last few years due to a lack of listings for related stocks, noting the city had lost investors interested in that sector to the U.S. and Taiwan.

Last year the Hong Kong government established a task force charged with improving stock market liquidity, and 12 short-term measures have been proposed since then to boost the market’s competitiveness. The city’s securities regulator and stock exchange are also exploring actions based on the task force’s suggestions for medium- to long-term initiatives, including improving the IPO system, optimizing trading mechanisms, improving market information and beefing up market promotion.

One measure drawing special interest from investors is lowering the minimum amount of each trade, which could draw in more mom-and-pop buyers who prefer to spend less. Under the current rules, investors must purchase at least a single lot of any given stock with each trade, which can get costly since such lots often consist of hundreds or even thousands of shares.

KGI’s Wen thinks the removal of the “single lot” minimum requirement would hold great appeal for investors. “If you are a retail investor and want to buy BYD, it will cost you more than HK$100,000 for each lot and you would not be able to buy much.”

UOB’s Yeung believes lowering transaction costs will also help to lift the market out of its current doldrums. “Cutting the stamp duty and the Stock Connect dividend tax are good ideas,” he said, referring in the latter case to the program allowing Hong Kong traders to purchase Shanghai- and Shenzhen-listed stocks and vice versa.

“I talked to many Mainland investors and asked them why they preferred (Shanghai- and Shenzhen-listed) shares even when Hong Kong-listed shares, especially high-dividend stocks, seemed cheaper. They pointed to the dividend tax in the Hong Kong market. Once that is cut, we might see a spike in” interest in buying Hong Kong stocks from Mainland China-based investors, he said.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.