Observations on Market Liquidity Enhancement
29 Aug 2022
Hong Kong has been a successful world-leading IPO centre, having ranked first in IPO funds raised globally in seven out of the past 13 years. Such a status has been, in part, supported by Hong Kong's proximity and connectivity to the Mainland market, benefiting from the continuous economic growth and innovation of the latter.
Despite the strong IPO market performance, secondary market activities in Hong Kong are arguably less vibrant, especially comparing to other leading global financial centres. Secondary market liquidity is an important indicator showing the level of development and sophistication of a market. Numerous studies have shown that stocks with higher liquidity tend to trade at a premium and, thus, at higher prices. Trading liquidity is not only important for secondary market investors, but also crucial to increasing a market’s appeal to potential issuers, for whom the company’s valuation is a key determining factor affecting the choice of a listing and trading venue. With heightened uncertainties revolving around the global financial arena, as well as potential opportunities arising therein, Hong Kong should strive to continuously enhance its trading mechanism and market infrastructure to cater to the changing needs of issuers and investors.
With the above in mind, the FSDC initiated a study and prepared this paper with an aim of identifying potential mechanism enhancements that can boost market liquidity in Hong Kong. Recommendations set forth in this paper have a focus on facilitating activities of exchange traded funds (ETFs) and market makers who can, in turn, better discharge their market function as liquidity providers to create a virtuous circle benefitting the market as a whole.