Liquidity Effects from Asian Market Linkages: Structural Improvement or Liberalization? by Michael Aitken, David Donald & Vito Mollica

Transcription

1 Liquidity Effects from Asian Market Linkages: Structural Improvement or Liberalization? by Michael Aitken, David Donald & Vito Mollica Integration and Interconnectedness in Global Finance Journal of Financial Regulation 2016 Annual Conference June 2016

2 Impact of public market intrastrcture 1. Market Structure a. Three modes of linkage b. The Chinese and ASEAN models 2. The Market Quality Dashboard a. A Google for financial economics? b. The role of lawyers 3. Findings from Shanghai Hong Kong Stock Connect a. Measures of liquidity b. Confusing results c. A market structure explanation? 4. Findings from ASEAN Trading Link a. Favorable for Singapore b. A market structure explanation? c. Next steps in verification

3 MARKET STRUCTURE

4 Bridging Markets Cross Listing: 1. Initiative is taken by individual issuers; 2. Cost is borne by the issuers; 3. Benefit is received by exchanges, broker-dealers and investors. Multinational Funds: 1. Initiative is taken by buy-side investors; 2. Cost is borne by funds and their investors; 3. Benefit is received by exchanges, broker-dealers and issuers. Direct Linkages: 1. Initiative is taken by matching platforms; 2. Cost is borne by exchanges, platforms (and large broker-dealers); 3. Benefit is received by issuers, investors and (small) broker-dealers. 4

5 The private route: an Asian securities market unified by international broker-dealers? Pan-Asian service 5

6 Shanghai-Hong Kong Stock Connect All investors A-shares plus SSE 180 and SSE 380 HKSCC SEHK Sub SSE Sub China Clear H-shares plus Heng Seng large and mid-cap indexes Only qualifying investors

7 ASEAN Trading Link SunGuard Data Line Option 2: Host Broker controls order Option 1: Direct Connection with Host Broker Monitoring Originating Broker Broker-to-broker settlement on a gross basis Host Broker Receiving Exchange Based on (bonded) home regulation and concentrated matching. Dedicated infrastructure is in place, however Use of a direct market access model i.e., the host broker remains liable for guest trading. No formal provision for clearing and settlement. The ASEAN TL can easily be ungraded to the SH-HK SC model. 7

8 THE CMCRC MARKET QUALITY DASHBOARD

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14 FINDINGS FROM SHANGHAI HONG KONG STOCK CONNECT

15 D Intercept lnvolume Volatility InverPrice D connect D connect nov2014 R- square D nov2014 Panel A: Liquidity Test - the Shanghai Stock Exchange Effective S ** ** ** ** ** ** (6.12) (-6.59) (159.06) (178.19) (1.85) (-2.61) (-22.54) Quoted spread ** ** ** ** ** ** Increase in liquidity, but decrease in depth (84.76) (-106.5) (162.59) (520.11) (3.34) (-0.81) (-3.34) - lndepth ** ** ** ** ** (41.86) (155.39) (-40.29) (159.96) (-0.24) (1.57) (-26.45) Panel B: Liquidity Test - the Stock Exchange of Hong Kong Effective S ** ** ** ** ** ** (108.9) (-96.74) (139.34) (76.95) (-33.73) (-1.33) (-18.51) No meaningful increase in liquidity, and decrease in depth Why? Qtd spread ** ** ** ** ** ** (158.61) ( ) (148.96) (105.41) (-36.73) (-1.59) (-13.49) lndepth ** ** ** ** ** ** ** (159.13) (244.63) (-126.7) (77.15) (9.69) (-3.76) (-17.17) 15

16 Average Stock Price (RMB) Average price of 10 most traded shares northbound (3 Nov Dec. 2014) A Shares (SH) H Shares (HK) Time (Day) 16

17 Possible explanations for SH-HK SC Findings 1. Offered liberalized access to the mainland Chinese market, which had been highly restricted for decades. 2. Growth opportunities of mainland Chinese companies exceed those of Hong Kong companies. 3. Higher volatility of the Shanghai market offers better shortterm trading returns. 4. Hong Kong large population of small broker-dealers crowded into the opportunity for trading in Shanghai. 5. Trading patterns are affected by the bets on the exchange rate of the RMB. 17

18 FINDINGS FROM ASEAN TRADING LINK

19 Table summarizes regression coefficient estimates that test the impact of the ASEAN TL on stock market liquidity in Malaysia, Singapore and Thailand. Quoted Spreads Effective Spreads Depth Malaysia no change Increase no change Singapore decrease decrease no change Thailand no change no change increase 19

20 Meaning of Findings? Hypothesis - Unsophisticated investors in Malaysia and Thailand could undertake international investments in Singapore that were previously too expensive. For - The Malay and Thai markets are populated by many brokerage firms that are less internationally connected than those in Singapore. For - Listing in Singapore are not limited to firms engaged in the Singapore economy (diversified portfolio of listed firms). Contra - Volume did not increase in Singapore. Next step for both the SH-HK SC and the ASEAN TL it is very useful to understand which entities are trading more after launch. This should be compared to the dramatic thinning of broker-dealer population under a fragmented platform model. 20

21 Thank you! webpage: Papers: