4 Exchanges Merge in Hong Kong : Computerized Hall Has Less Glamour and Stricter Rules

Stock trading in Hong Kong loses some of its glamour and freewheeling character with the merger today of the colony’s four exchanges in a new computerized trading hall under strict new rules.

Directors of the new Stock Exchange of Hong Kong, nine years in the planning, hope that it will end some of the confusion associated with having four exchanges that trade in many of the same stocks.

“We now have a united front for the securities industry,” exchange Chairman Ronald Li said. “We will have a better image as far as foreigners are concerned in that they will be dealing with one substantial body.”

But the exchange has drawn protests from some listed companies that resent the new rules and from smaller brokerage firms that object to the expected fierce competition from banks, scheduled to become exchange members for the first time.

The oldest of the four current exchanges, the Hong Kong Stock Exchange, was founded in 1891. But the market discouraged outsiders and, in 1969, the Far East Exchange was founded, encouraged by growing local interest in securities. The Kam Ngan and the Kowloon exchanges opened in 1970 and 1972, respectively.

In 1973, the government banned the setting up of new stock markets, and a few years later it proposed the creation of a unified stock exchange. Problems arose when it was agreed to allow banks as members of the new market and existing brokers protested, fearing that the banks’ greater assets and connections would give them too great an advantage.

In an attempt to get around this, a deal was struck under which bank-related brokers will operate under restrictions for 18 months, after which the situation will be reviewed. The restrictions forbid the banks from trading with each other and from matching buy-and-sell orders for their own clients.

The restrictions will “give the smaller brokers time to adjust to the new environment,” said Derek Murphy, deputy commissioner for Securities and Commodities Trading, a government watchdog agency.

Difference of Opinion

But many market analysts still believe that some small brokers may be forced out of business.

“I think the number of brokers registered with the unified stock exchange is likely to come down within the next two years because some smaller brokers may not find it profitable to maintain a seat,” said Larry Tam, research director for Sung Hung Kai Securities.

Li, however, said the small brokers will not suffer because they will concentrate on a loyal clientele of individuals for whom they provide personal advice.

Listed companies also have objected to the new rules, which require greater disclosure, with some even refusing to sign the registration forms. The cost of a listing--up to $4,000 a month--also has caused some protests.

Under the the new rules, brokers for the first time will have to maintain $128,000 in capital, of which 20% must be in liquid assets. For corporate members, including banks, the minimum is $640,000, with 10% in liquid assets.

The new exchange is to be housed in the prestigious Exchange Square building. The traditional tote boards and floor traders have been replaced with 800 booths housing computer terminals that offer 400 pages of information on stock prices, companies’ results and news reports.

Orders can be placed by computer and negotiations are done by telephone. Once a deal is struck, the sale is entered into the computer and recorded on a central electronic board. Among things that will be possible with a unified exchange, Li said, “we can develop the over-the-counter market to help smaller and budding companies who are in need of finance.”

Li said he does not believe that the exchange will greatly affect the Hong Kong market, traditionally weighted toward property issues.

“If you change the implements or the rules of a certain game, you’re not going to change the game itself,” he said.