Market operator Hong Kong Exchanges and Clearing (0388) abandoned initiatives aimed at tightening the trading spreads for cheaper stocks in the face of intractable opposition from securities brokers.
Market reform advocates described the latest development as the government "once again caving in to the vested interests of a minority of brokers," while securities dealers heaved a sigh of relief.
The decision to abandon the proposal came Wednesday at the end of an HKEx board meeting to review trading data on about 700 stocks priced below HK$2.
HKEx directors, largely dominated by financial professionals allied to the government, reversed the decision by the former board of directors, abandoning initiatives to cut minimum trading spreads - the difference between bid and ask price - for equities and warrants trading at between 25 HK cents and HK$2. The reforms were to be implemented this quarter.
Hong Kong Institute of Securities Dealers chairman Vincent Lee Kwan- ho, who represents brokers on the 13-member HKEx board of directors, said the decision balances the interests of various parties. He said the decision was based on past trading data and the opinions of investors.
Shareholder activist David Webb, who is also an HKEx director, said he was "disappointed" the HKEx put the interests of a small group of brokers ahead of market reforms.
"Refusing to reduce spreads makes it harder to justify requests to the government to reduce stamp duty on the grounds of transaction costs," Webb said.
Webb said he will encourage companies with securities trading below HK$2 to consolidate their shares to move into a more efficient trading range and separate themselves from some heavily-manipulated junk stocks.
Market observers said the policy reversal is a replay of the humiliating backdown on the goods and services tax by the administration of Donald Tsang Yam-kuen, who is seeking a second term as chief executive in March. The broking community has 12 seats on the 800-member election committee, which votes for the chief executive.
As the first stage of the proposed reforms HKEx tightened the minimum trading spread for 36 stocks priced above HK$30 and left those trading between HK$20 and HK$30 unchanged, in initiatives taken in July 2005.
But having failed to convince the market that narrower spreads would encourage more trading and facilitate further development of the financial market, HKEx partially backed down by leaving 2,500 stocks and warrants trading below HK$2 temporarily unchanged. Brokers who mounted strong opposition at the time said the proposal undermined their interests.
Brokers protested that they will have to shoulder a bigger burden if clients were to make more trades at different prices to build up their positions, especially for cheaper stocks that have few sellers.
Midway through last year, legislator Chim Pui-chung, who represented the brokers, threatened to lead a thousand securities dealers in a June 4 protest march. HKEx then summoned a board meeting, in which the six government- appointed directors flip-flopped by voting against any change to the trading spreads of cheaper stocks.
Tony Espina, chairman of the Hong Kong Stockbrokers Association, said he welcomed the decision since it does not adversely affect investor appetite for cheaper stocks.