Hong Kong Exchanges And Clearing Developing Blockchain System For Chinese Stock Trading

Hong Kong Exchanges And Clearing Developing Blockchain System For Chinese Stock Trading

Hong Kong Exchanges has reportedly turned to blockchain with the focus to open up Chinese shares. Hong Kong Exchanges and Clearing is creating a new blockchain-powered scheme crafted to aid overseas investors to trade Chinese shares through Hong Kong’s Stock Connect system, according to ‘Charles Li’ the chief executive of Hong Kong Exchange.

Stock exchanges across the world are making their way towards the digital ledge technology, commonly known as blockchain with the hope to improve the speed and efficiency of each transaction while enabling easy settlement and execution of trades.

China has a same-day trading time scale, known as “T+0”, which has recently caused problems especially to investors who trade on the “T+2” trade scale which stands for two-day trading scale between the settlement and trade.

Stock Connect system connects Shanghai and Shenzhen exchanges of the mainland with Hong Kong. It is the only platform for overseas investors to purchase stocks listed on the Hong Kong board. The Stock Connect which is also known as the northbound trading allows “southbound” access for investors of mainland interested in buying shares listed on the Hong Kong exchange.

The product under development deploys blockchain to enhance the speed of exchanging information between brokers, asset managers, and custodian as well the Hong Kong Exchange on northbound trades made via Stock Connect.

The technology further enables asset managers to share their requirement pertaining to how they would like the shares to be traded and allocated on behalf of their clients.

Lukas Petrikas, the co-head of the innovation lab of Hong Kong Exchanges said that at present the problem is related to the shortage of time. There is a very limited time period between the execution of the trade and the cut off time of settlement. It usually takes somewhere from 4 to 5 hours to settle a trade. During the time, asset managers are required to make a necessary decision pertaining to allocation of the trade with respect to their funds. They are also required to pass the information to others involved in the trade including brokers and custodians, informed Lukas.

The problem is quite prominent for investors trading Chinese shares in entirely different time zones. Lukas said that although the participants of the share market have worked out the time to avoid any obstacle in trading while in being in different time zone. The solution, however, is ‘sub optimal’ and includes clunky bilateral communication that may further cause bottlenecks.

The product or prototype has been exposed to a certain number of traders. The solution, however, will be introduced to a wider audience in the coming future. The Australian markets operator ‘ASX‘ in 2017 said that it may replace its clearing system, register, and settlement with the latest blockchain technology. ASX cited the need to cut cost as one of the main reason behind its plans to introduce blockchain technology. However, later in September, ASX postponed its switchover plans for the next six months. And now the Hong Kong Exchanges seem to be following the footsteps of ASX.