China and Hong Kong’s securities regulators have greenlighted the integration of block trading and manual trades into Stock Connect, a cross-border platform that enables investors to trade shares listed on the Shanghai Stock Exchange (SSE) and the Hong Hong Stock Exchange (HKEX). Block trading refers to the purchase or sale of a large number of securities. On the other hand, manual trades are transactions arranged without the use of automated or algorithmic trading systems.

Bridging Offshore and Mainland

The Hong Kong Securities and Futures Commission (SFC) and the China Securities Regulatory Commission (CSRC) jointly announced the planned move today (Friday) in a statement, explaining that the move will bolster the Stock Connect programme, introduce additional trading methods, improve trading efficiency, and foster the mutual growth of capital markets in both jurisdictions.

The regulatory authorities kicked off the Stock Connect programme in November 2014 with the linking of the SSE and HKEX. This was followed up with the integration of the Shenzhen Stock Exchange (SZSE) into the HKEX two years later.

Stock Connect offers two trading directions: northbound and southbound trading. While northbound trading enables international and Hong Hong investors to trade selected A-shares listed on the SSE AND SZSE, southbound trading offers access to shares listed on HKEX to Mainland Chinese investors. A-Shares are the stocks of mainland China-based companies that are denominated in Renminbi and traded in the Shanghai and Shenzhen stock exchanges

As both regulators have reached a consensus on introducing block trading, exchanges and clearing houses in both territories are to be supervised in order to study the business, technical and regulatory arrangements required for the integration.

“Under Stock Connect, offshore investors will be able to conduct block trades on the Shanghai Stock Exchange and the Shenzhen Stock Exchange through the northbound trading link while Mainland investors will be able to conduct manual trades on the Stock Exchange of Hong Kong Limited (SEHK) through the southbound trading link,” the securities regulator explained. “Both northbound and southbound block trading will be introduced at the same time.”

Modus Operandi

In a separate statement, HKEX elaborated that block trading provisions for Stock Connect will be crafted using the current operational frameworks and rules of each market, with suitable modifications put into consideration.

“Block trading is an important trading mechanism to achieve the best execution of large-sized transactions and minimise the price impact on the market,” Julia Leung, the Chief Executive Officer of SFC, explained. “This initiative will enhance the price discovery functions of both markets and encourage more overseas investors to participate in the A-share market through Stock Connect.”

The planned move comes several months after both regulators signed a Memorandum of Understanding (MoU) to strengthen their cross-border regulatory efforts in securities offering and listing by domestic companies in both territories. Additionally, the memorandum provides clarification on how both regulators will go about a joint cross-border enforcement and information exchange, Finance Magnates reported.