Opinion | Securities lending and short selling can boost Hong Kong stock exchange’s liquidity push

Amid efforts to improve the Hong Kong stock market’s liquidity and bolster the city’s status as a financial hub, securities lending must not be overlooked

The new task force could consider making all stocks eligible for short selling and increasing the quantity of securities available for lending

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A man walks past the empty Exchange Square in Central on September 1. A new task force has been set up to review the stock market’s liquidity and find ways to enhance its status as a global financial hub. Photo: EPA-EFE

Published: 2:30pm, 14 Sep 2023

With Hong Kong’s stock market liquidity task force meeting for the first time, the discussion on how the city’s stock market can boost trading turnover has focused on measures to attract more high-quality listings and reducing the cost of trading by cutting stamp duty. More initial public offerings and lower-cost trading can certainly help attract capital to Hong Kong over time, but the task force should not overlook the contribution that securities lending and borrowing can make to increasing trading volumes.

Securities lending and borrowing involves the owner of shares or bonds transferring them temporarily to a borrower. The borrower typically collateralises the loan and pays a borrowing fee to the ultimate owner.

About US$2.6 trillion of securities were on loan globally at the end of June, according to the International Securities Lending Association, and securities lending is widely recognised as supporting liquidity and price discovery in capital markets.

Hong Kong is a leading market for securities lending and borrowing, founded on long-established practical and pragmatic rules. This area of financial markets enables investors to hedge risk and express a view on the direction of stocks through short selling.

The city’s regulators have long understood the importance of this market to generating liquidity. Securities lending thrives in Hong Kong because short selling is transparent and well-regulated. However, there are several ways that these practices could be enhanced to help unlock additional liquidity for the broader market.

Short selling is not primarily a speculative activity, contrary to the popular perception of it being used to bet against certain stocks. Rather, its main application is in risk management. The Securities and Futures Commission noted in its latest Half-yearly Review of the Global and Local Securities Markets that “exchange-traded products [ETPs] have become a dominant component of the daily short selling turnover, and the majority of the short selling activities of ETPs were conducted by market makers”.