As execution-only traders look for opportunities to maximise profits, liquidity is an essential element of the equation. We have managed to find detailed data going back to the beginning of 2002, showing not only the level of the Hang Seng index but also monthly trading volumes. Considering that the index started the period at 11,368 and is currently 20,170 (up 77%), what would you expect to have happened with trading volumes?

 

Near tenfold increase in trading volumes

 

As you will see from the table below, there has been an enormous increase in Hang Seng annual trading volumes:-

 

Year	Annual trading volume
2002	58,302,134,800
2003	64,874,784,400
2004	77,555,570,200
2005	81,848,910,800
2006	131,194,355,000
2007	480,901,368,200
2008	597,638,693,100
2009	558,984,373,300
2010	398,953,256,600
2011	445,291,025,200
2012	391,349,427,500
2013	402,060,736,200
2014	409,541,179,800
2015	468,140,226,100
2016	413,571,512,500
2017	438,075,273,000
2018	493,923,517,300
2019	415,310,100,500
2020	526,715,974,800
2021	570,597,751,600

 

Source: https://finance.yahoo.com

 

Over the period in question, annual trading volumes have increased from 58.3 billion to a staggering 570.5 billion shares. As you can see from the table, there was a massive volume increase during 2006, 2007 and 2008. This has created the perfect environment for day traders, and with many technology shares now repatriating back to the Far East, we could see further improvements in volume!

 

Why has there been such a jump in Hang Seng index trading volumes?

 

We saw a significant number of regulatory changes from 2006 onwards, which had a massive impact on activity and, more importantly, the attractions of the Hang Seng index to domestic and international investors.

 

Formal regulatory structure

 

Any investment market requires a formal regulatory structure to give investors confidence, improve trading volumes and liquidity. Over the years, we have seen some significant changes with the Hong Kong stock exchange, which have positively impacted the Hang Seng. Trade execution is much easier today than it was 20 years ago.

 

Derivatives markets

 

Over this period, we also saw a significant increase in activity in the derivatives market. This had the knock-on effect of increasing trading of the Hang Seng index, on which many derivatives are based.

 

Overseas companies

 

Since the turn of the century, we've also seen a move to allow the formal listing of overseas companies on the Hong Kong stock exchange. This attracted more international investors, including institutions, and increased demand for Hang Seng index stocks.

 

Shanghai Stock Connect

 

While still in its relative infancy, the pact with the Shanghai stock exchange, which allowed Chinese listed companies to trade on the Hong Kong stock exchange, is having a positive impact. Again, this is causing a knock-on effect on trading volumes across the main Hong Kong indices, with the Hang Seng benefiting.

 

Execution only trading

 

On top of that, the introduction of electronic trade executionhas attracted numerous execution-only investors, many of whom are focused on relatively short-term trading. While some people are critical of short-term traders, they provide vast market liquidity. 

 

Here at Global Investment Strategy (Hong Kong), we have been investing in new technology, dealing platforms, and also enhancing our clearing services on an ongoing basis.Consequently, we have seen a significant increase in the number of trading accounts, with deep market liquidity an attraction for many investors. After all, if you are a short-term trader, you must be able to buy and sell individual shares insignificant size.

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