HKEX: Press Onward with Essential Board-Lot Reform
Restrictions on purchasing share quantities in board lots are outdated. Numerous major stock markets globally have permitted investors to acquire any desired number of shares from publicly traded companies for quite some time now.
Hong Kong continues to enforce restrictions on lot purchases. The Hong Kong Exchanges and Clearing (HKEX) plans to examine this longstanding policy, and it’s high time adjustments were considered.
Removing these limitations would increase liquidity, stimulate trading activity, and provide smaller individual investors more options.
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Consider China’s biggest electric vehicle manufacturer, BYD, which has seen its stock price climb above HK$400 (US$51) recently. This makes the cost of purchasing just one board lot, consisting of 500 shares, at least HK$200,000. Numerous smaller investors lack such substantial capital, and engaging in margin trading—borrowing funds to invest—increases their risk exposure significantly.
An alternative reform could involve standardizing board-lot sizes to reduce the minimum investment requirement, making these options more accessible financially.
Currently, HKEX permits listed firms to determine their own board-lot sizes, which may vary between 10 shares and 10,000 shares. Historically, prior to the availability of advanced computer processing capabilities and online trading systems, uniform lot sizes were implemented to prevent the occurrence of odd lots.
However, this could lead to issues of its own. Take shareholders of well-known stocks like HSBC; they can opt either for receiving dividends or additional shares. Should you decide on the latter, you might find yourself holding fractional positions. Although these holdings can still be sold, they tend to lack liquidity and often come with higher commission fees.
Financial technology, commonly known as fintech, has effectively addressed these concerns, enabling investors to engage in trading with virtually any sum or volume they wish.
However, changes would require an upgrade in trading systems, which smaller brokers may find a financial burden. Many of them are lagging behind in fintech. To stay competitive, they need to make the adjustment; likewise the HKEX, whose trading system has been designed to handle board lots.
However, numerous Hong Kong investors also participate in stock trades listed in the United States, where lot sizes are much more adaptable. In order to enhance its competitiveness, HKEX ought to provide similar flexibility in trading options.
Several choices exist for the exchange to seek input from market participants, yet upgrading should not be sidestepped.
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The article initially appeared on the South China Morning Post (www.scmp.com), which is the premier source for news coverage of China and Asia.
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