The Hong Kong Securities and Futures Commission announced recently that it is considering whether the territory should move towards a US style 'market-maker' system of buying and selling shares, and is consulting industry participants.
The market maker system used on the major North American stock exchanges involves selected brokers seeking out share trading business by constantly offering 'buy' and 'sell' prices on each company's shares in order to drum up business. However, at the moment, Hong Kong uses a more passive 'order driven' system whereby client orders are put into the exchange's trading system as and when they arrive, and a buyer must wait to be matched with a potential seller, or vice versa.
Although this has previously been a satisfactory system for large blue chip stocks, as there has been enough investor interest to build up liquidity, it has meant that small stocks which did not generate as much interest have languished. 'As Hong Kong is an international financial centre, we should have active trading for both large and small stocks,' explained Andrew Sheng, the Chairman of the SFC. 'At present there is very little trading on these small stocks. The introduction of a market-maker system may help to solve the problem and increase their liquidity.' Mr Sheng added that he also believed that the new system, if implemented, would be good for the territory's small brokers, who he feels would be ideal candidates to act as market makers for the small companies.
The Chairman of the Hong Kong Stockbrokers Association, Paul Fan Chor-ho stated recently that he supported the introduction of a market maker system, as he believed it would be of benefit to companies, brokers, and investors. However, both men agreed that before the implementation of such a system could take place, safeguards would need to be put in place to ensure that unfair manipulation of stock prices by the market makers was not possible.
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