In the next decade, attractive opportunities will continue to abound for Asia’s securities and futures markets, driven by the region’s economic performance, the growing issuer and investor base, and the increasing financial sophistication of issuers and investors. The region’s market capitalisation is expected to double within the next five years. In this context, the Mainland market will increasingly represent a massive opportunity in itself. Since their emergence in 1991, the two exchanges in Shanghai and Shengzhen now have 745 companies listed, larger in number than the Hong Kong, Taipei and Singapore or Bangkok exchanges.Total market capitalisation has already reached US$206 billion in 1997 or 23. 4% of GDP.

The number of individual investors exceeds 38 million at last count, second only to the United States. 2. 2 At the same time, and looking beyond fluctuations such as those experienced in the past 18 months, global investors are expected to continue investing in the region’s markets, while Asia-based retail and institutional investors will provide an increasing pool of funds for investment. The range of securities and futures products available to investors and issuers is also expected to expand, especially in the fixed income and derivatives areas.A large share of these opportunities will involve cross-border capital raising and securities trading.

Mainland related opportunities For much of this decade the presence of Mainland issuers and investors has boosted the size of Hong Kong’s securities and futures market. These issuers and investors represent both opportunities and challenges to Hong Kong’s market operators and regulators. It is critical for Hong Kong’s future role as the primary venue for capital raising by Mainland issuers that Hong Kong equips itself to be the best market for international listing and cross-border trading of Mainland stocks.Other major financial centres including New York and London have expressed ambitions of capturing a share of this new business.

In the face of these challenges, Hong Kong has to ensure that its trading and settlement system, regulatory infrastructure, intermediaries and products are responsive to the needs of attracting Mainland issuers and retaining investors interested in Mainland stocks, and at the same time upholding international standards to maintain confidence in its markets. Hong Kong is facing increasing competition from other Asian markets.Supported by their governments, the region’s securities and futures markets (particularly Singapore, Kuala Lumpur and Taipei) are investing heavily to take advantage of domestic growth opportunities, and are keen to capture regional business.More specifically, these markets are: (a) lifting restrictions on outside ownership and opening up their markets to international investors and intermediaries; (b) investing in new technology to create state-of-the-art trading and settlement and clearing systems (in place of their traditional open-outcry trading floors); (c) upgrading their regulatory frameworks to international standards; and (d) segmenting their exchanges into sector-specific markets, main and second boards, and developing their product ranges to include off-shore and regional derivative instruments and debt instruments.

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In different respects these markets have evolved faster than Hong Kong, with the result that Hong Kong’s lead in the region is being gradually eroded. The competitive forces presented by these markets cannot be ignored. As the financial market becomes more globalised and investors become more sophisticated, competition from further afield has also become an increasing challenge.

Stocks of major listed companies on the Stock Exchange of Hong Kong Limited (SEHK) can be traded easily in London and increasingly also in New York. Financial and equity-based derivatives are even less geographically bound and growing international competition in this area will be a fact of life in the future. As the securities and futures industries are changing dramatically, Hong Kong’s own market infrastructure is rapidly becoming outdated for the increasingly competitive global environment. Failure to respond to this challenge will constrain Hong Kong’s ability to capture growth opportunities and to achieve its full potential.It is crucial for Hong Kong to define a new and more competitive market model for the future.

First, advances in information technology have led to significant changes in the landscape of the securities market, both exchange-based and “over-the-counter”. Technological advances have lowered the entry barriers to establishing new exchanges, and this has led to the widespread emergence in recent years of alternative and proprietary trading systems which are executing trades outside traditional exchanges between large participants at low cost and competitive speed.Two broad categories of non-exchange automated trading systems are challenging the trading function traditionally carried on by exchanges.

The first are proprietary trading systems such as Instinet, which usually take the form of screen-based trading systems owned and operated as independent businesses by non-self-regulatory organisations. At present, participation in these systems is generally restricted to market professionals and in some cases to institutional investors, but access by retail investors is imminent.The other main type of automated trading systems consists of internal trade crossing systems operated by large intermediaries. There is a large and increasing variety of these alternative trading systems in use and it is difficult to distinguish the services that they offer from those offered by regulated exchanges.

Within the exchange set-up, technological advances have also precipitated a move from floor-based trading to electronic trading, thereby eliminating the need for physical location and proximity of intermediaries.Although the extent of automation varies, all exchanges have now computerised some aspects of their operations. Some have introduced automation in back office clearing and settlement functions while retaining the trading floor, whereas others have moved to a fully automated vertically integrated trading and settlement system and have done away with a physical trading place. Advances in, and the falling costs of, telecommunications technology have led to an increase in cross-border trading systems, either in the form of traditional exchanges placing trading terminals abroad or the emergence of cross-border alternative trading systems.