HKEX's series of reforms: opportunities or challenges?

Since the second half of 2025, $HKEX(00388.HK) (hereinafter referred to as "HKEX") has intensively introduced or planned a series of institutional optimization measures covering multiple core areas such as trading mechanisms, listing rules, settlement efficiency, and ecosystem building.

Against the backdrop of intensifying competition among global financial centers (with Shanghai and Singapore continuously enhancing their attractiveness) and the urgent need to boost liquidity in the Hong Kong stock market, this series of "combo punches" represents HKEX's proactive efforts to enhance market competitiveness and carries expectations for reshaping the market ecosystem. However, while each measure releases positive effects, it also harbors challenges to market inertia and the interplay of multiple interests. Only by objectively examining their pros, cons, and controversies can we more clearly grasp the direction of reform in the Hong Kong stock market.

Three Strategic Directions Guide HKEX's Breakthrough Path

We summarize that HKEX's recent reform actions primarily target three strategic directions: improving market efficiency, optimizing the regulatory framework, and expanding the market ecosystem.

From adjustments to lot sizes to shortening settlement cycles, from refining public float requirements to the launch of the Tech 100 Index, each initiative addresses current market pain points.

In terms of trading mechanisms, optimizing lot sizes, lowering minimum price increments, and improving margin collateral arrangements directly reduce trading costs. These seemingly technical adjustments are, in fact, crucial steps to lower market participation threshold.

Regulatory framework reforms place greater emphasis on balancing efficiency and risk. Adjustments to continuous public float requirements and optimizations to IPO pricing rules aim to provide issuers with more flexibility while enhancing market fairness and transparency.

Efficiency Revolution: How Trading Mechanism Optimizations Reshape Market Vitality

HKEX's plan to optimize lot sizes aims to reduce the number of lot size types from over 40 to just 8, halve the minimum lot value guidance from HKD 2,000 to HKD 1,000, and introduce an upper limit of HKD 50,000 for some companies. This adjustment not only simplifies the trading process and improves settlement efficiency but also significantly lowers the investment threshold for high-priced stocks—currently, many listed companies in Hong Kong have lot values exceeding HKD 50,000, including $TENCENT(00700.HK), $CATL(03750.HK), and $HANSOH PHARMA(03692.HK). After the adjustment, retail investors will have the opportunity to participate, injecting incremental funds into the market.

The accompanying measure to lower minimum price increments has already covered stocks in the HKD 10-50 range in its first phase, reducing the minimum price movement unit by up to 60%. This directly lowers investors' trading spread costs while improving price discovery efficiency and enhancing market liquidity, particularly benefiting the trading activity of low-priced stocks. However, this change also increases the pressure on market makers to maintain market depth.

Discussions on shortening the settlement cycle for the stock spot market from T+2 to T+1 or even T+0 aim to reduce counterparty risk and capital occupancy costs, mitigate counterparty risk (such as the risk of counterparty default), and reduce settlement uncertainty caused by price fluctuations, while aligning with global major markets. However, it may face significant operational challenges, such as brokers, custodians, and banks needing to upgrade IT systems to accommodate the shortened settlement time. Cross-border transactions may also face challenges like time zone differences and foreign exchange conversions, creating a chain reaction on coordination mechanisms.

Institutional Balance: The Game of Risk and Innovation in Regulatory Optimization

The reform of continuous public float requirements reflects subtle changes in HKEX's regulatory stance. The new rules propose to abolish the practice of mandatory trading suspensions due to insufficient public float, shifting to a disclosure-based regulatory approach.

This change provides issuers with greater flexibility in capital operations, particularly facilitating share buybacks. However, investors need to more carefully assess the risks of stocks with special markers.

Optimizing IPO pricing and public market rules further refines the IPO market mechanism. The new pricing mechanism aims to reduce IPO pricing deviations and prevent excessive volatility. However, the market worries that this may limit price discovery functionality.

HKEX and the Securities and Futures Commission jointly issued a letter urging investment banks to "adopt a proper issuance attitude," directly addressing market concerns about "over-packaging." This regulatory stance shows that HKEX is placing greater emphasis on the quality of listed companies, not just quantity.

Ecosystem Expansion: Dual Drivers of Product Innovation and Infrastructure Upgrades

The launch of the HKEX Tech 100 Index is a strategic move to expand index business and enrich the product ecosystem. This index covers six major hard-tech themes, including artificial intelligence and biotechnology, aiming to increase market focus on the new economy sector.

The official launch of the Integrated Fund Platform's order routing service marks the entry of Hong Kong's fund market into a more efficient era of connectivity. This platform connects key participants in the fund distribution ecosystem, potentially lowering fund trading costs and improving market efficiency.

The "HKEX Link," to be launched in 2026, aims to optimize issuer communication processes and enhance market transparency. The introduction of this digital infrastructure will significantly improve the timeliness and accuracy of investor access to information.

Optimizations to the structured product listing regime, particularly the reduction in warrant issuance prices, will bring structured products closer to the price of underlying assets, enhancing their attractiveness. However, this may also increase product complexity, demanding higher investor education.

Controversies and Challenges in Reform: The Growing Pains of Balancing Interests and Market Adaptation

While the long-term value of many initiatives is promising, their implementation faces controversies and challenges from market inertia and interest realignment, with the short-term negative impacts of some measures also not to be overlooked.

Concerns about market volatility triggered by trading mechanism adjustments are the most prominent. After the optimization of lot sizes lowers the participation threshold for retail investors, some market participants worry that the proportion of retail trading may exacerbate volatility in some small-cap stocks. Although HKEX cites global market data to argue that lot size has no inherent correlation with volatility, the inherently weaker liquidity of small-cap stocks, combined with the short-term nature of retail trading, may still amplify price volatility risks. Similar controversies exist for the measure to lower minimum price increments, with some market makers and retail investors pointing out that narrowing spreads for lower-priced securities may compress profit margins from round-trip trading and liquidity provision, potentially leading to a decline rather than an increase in liquidity for this market segment. While HKEX emphasizes the need to balance different investor demands, the second phase of adjustments must still address these concerns.

Some measures pose severe adaptability challenges for market participants. The adjustment of lot sizes is expected to impact some issuers. For Hong Kong's brokers of varying sizes, measures such as lot size standardization and settlement rule optimizations require simultaneous upgrades to trading systems and adjustments to fee models, with smaller brokers likely facing higher transformation costs. The consultation on extending trading hours, while aimed at aligning with global markets and enhancing international competitiveness, has also raised industry concerns about operational costs—insufficient liquidity during non-core hours may lead to price distortions, and nighttime trading could further amplify the technical advantages of high-frequency trading institutions, creating unfairness for retail investors while significantly increasing brokers' labor costs and system loads.

Reforms to the IPO pricing mechanism have sparked controversies over the interests of retail investors and small-to-medium investment banks. Under the old rules, retail investors could receive up to 50% of shares through the clawback mechanism, but this has been tightened under Mechanism A, with the clawback ceiling for oversubscriptions exceeding 100 times reduced to 35%. Retail investors' quotas in hot IPOs have significantly decreased, leaving them facing the short-term dilemma of "harder-to-get good stocks." It's worth noting that the current "king of oversubscription" in IPOs still relies on retail investors' thousand-fold oversubscriptions. For small-to-medium investment banks, their disadvantage in institutional resources makes it difficult to adapt to the operation of Mechanism B, forcing them to rely more on Mechanism A's retail market. Market resources may further concentrate toward top-tier investment banks, exacerbating industry polarization.

The consultation on continuous public float requirements is also controversial. The proposed reduction of initial public float for A+H issuers from 15% to 10%, with further exploration of lowering it to 5%, may meet the financing needs of large enterprises but could reduce stock liquidity and harm the interests of small and medium investors.

Additionally, the implementation effects of some measures remain uncertain. While discussions on shortening the stock spot market settlement cycle align with the global T+1 settlement trend, they require consensus among market participants on system upgrades and risk management, making short-term progress difficult. The consultation on optimizing the structured product listing regime, if failing to adequately balance innovation and risk, may increase the complexity of structured products, raising ordinary investors' understanding costs and investment risks.

The Essence of Reform: HKEX's Breakthrough and the Long-Term Value of Hong Kong Stocks

Looking at HKEX's intensive institutional reforms, they are driven by both the intensifying competition among global financial centers and the developmental challenges of the Hong Kong stock market itself.

This year, Hong Kong IPO fundraising has reached 2.95 times that of last year, with over 300 companies still in the queue for approval. However, the issue of tight market liquidity remains unresolved, with southbound capital experiencing its first net outflow in six months. Improving market efficiency and attracting incremental funds have become urgent priorities.

From an international perspective, Nasdaq's plan to introduce 24-hour trading and the Tokyo Stock Exchange's extension of trading hours show global capital markets rapidly evolving toward round-the-clock operation. HKEX's measures are a response to this trend, aiming to consolidate its position as an international financial center.

In the long run, the core value of this series of measures lies in aligning the "scale expansion" and "quality improvement" of the Hong Kong stock market. While introducing diverse products, welcoming numerous new listings, and lowering trading barriers, the proposed optimizations to IPO pricing mechanisms and norms for investment banks' issuance attitudes directly address long-standing issues of pricing distortions and quality control. Measures such as lot size standardization and shortened settlement cycles aim to improve the market's fundamental operational efficiency, aligning with international mainstream markets. Despite facing numerous controversies and challenges in the short term, as the market gradually adapts to the new rules, the pricing efficiency, liquidity, and transparency of Hong Kong stocks are expected to continuously improve, creating a better institutional environment for the inflow of long-term capital.

Echoing HKEX's reforms, the annual "Top 100 Hong Kong Stocks" selection is about to announce its results. This selection focuses on the most investable and growth-potential listed companies in the Hong Kong stock market, providing investors with references through comprehensive evaluations of corporate scale, profitability, growth potential, and other multidimensional indicators.

Against the backdrop of HKEX's market reforms, the "Top 100 Hong Kong Stocks" selection further highlights its value discovery function. Investors can use this selection to more accurately identify high-quality companies that can benefit from market reforms and have long-term growth potential. The results are about to be announced, deserving the attention of all market participants.

Author: Wu Yan