Hong Kong Exchanges and Clearing is developing a new blockchain-powered programme designed to help international investors trade mainland Chinese shares via Hong Kong’s Stock Connect system, its chief executive Charles Li said on Tuesday.
Stock exchanges around the world are trying to develop ways of using distributed ledger technology, known as blockchain, to boost the speed and efficiency of their processes, with settlement and execution of trades particular targets.
China’s same-day trading and settlement timescale, which is known as “T+0”, has caused problems for investors elsewhere who more usually work on “T+2”, which is two days between the trade and settlement.
Stock Connect, which links the two mainland exchanges in Shanghai and Shenzhen with Hong Kong, is the only means for international investors to trade mainland stocks directly.
This is known as “northbound” trading and the system also allows “southbound” access for mainland investors to buy Hong Kong-listed stocks.
The prototype uses blockchain to improve the sharing of information between asset managers, brokers, custodians and the Hong Kong Exchange on northbound trades made through Stock Connect.
It also allows asset managers to specify, in advance, how the shares they have traded on behalf of clients should be allocated between their funds.
“The problem at present is that there is a very short time period between when you execute a trade and the settlement cut off time, usually just four to five hours, during which asset managers need to decide how to allocate that trade to their funds, and pass that information down the chain to brokers and custodians,” Lukas Petrikas, co head of HKEX’s innovation lab, said in advance of the announcement.
This is particularly problematic for those trading Chinese shares in different time zones, as the crucial period could be in the middle of the night.
Petrikas said that while market participants had developed work-arounds, these were “sub optimal” and involved clunky bilateral messaging systems which could cause bottlenecks.
The prototype, which has been trialled by a handful of market participants, will soon be rolled out to a larger group.
Last year, ASX, the Australian markets operator, said it would replace its registry, settlement and clearing system with blockchain technology to cut costs. However, in September it delayed the switchover for a further six months.