Leveraged and Inverse Products
New Spread Table for ETPs
To foster liquidity growth in Hong Kong’s ETP market and to create greater trading flexibility for ETP investors, HKEX has introduced a new spread table with reduced tick size for Hong Kong-listed ETPs. (Download primer)
| Currency Unit |
New Tick Interval |
Old Tick Interval |
| From |
0.01 |
to |
0.25 |
0.001 |
0.001 |
| Over |
0.25 |
to |
0.50 |
0.005 |
| Over |
0.50 |
to |
1.00 |
0.010 |
| Over |
1.00 |
to |
5.00 |
0.002 |
| Over |
5.00 |
to |
10.00 |
0.005 |
| Over |
10.00 |
to |
20.00 |
0.010 |
0.020 |
| Over |
20.00 |
to |
100.00 |
0.020 |
0.050 |
| Over |
100.00 |
to |
200.00 |
0.050 |
0.100 |
| Over |
200.00 |
to |
500.00 |
0.100 |
0.200 |
| Over |
500.00 |
to |
1,000.00 |
0.200 |
0.500 |
| Over |
1,000.00 |
to |
2,000.00 |
0.500 |
1.000 |
| Over |
2,000.00 |
to |
5,000.00 |
1.000
|
2.000 |
| Over |
5,000.00 |
to |
9,999.00 |
5.000 |
A spread table maps out the minimum price movements (i.e. tick intervals) for securities trading at different price ranges. For example, in the new spread table for ETPs, for a product trading at $15, i.e. in the price range of $10 to $20, the new tick interval will be $0.010 – a 50% reduction from the old tick interval of $0.020.
| |
Greater flexibility |
The narrower price intervals give investors greater flexibility to react to small market changes |
| |
Increase price efficiency |
The new spread table allows market prices to adjust to new information more promptly, so that prices can better reflect the prevailing market conditions |
| |
Potential for lower costs |
Reduced tick sizes lay the basis for the further narrowing of bid-ask spreads, which can potentially lead to lower transaction costs |
The reduction in tick size for ETPs will effectively reduce their minimum achievable spreads, which is favourable to the further tightening of trading spreads of liquid, tick-constrained ETPs.
The following case study selects five liquid ETPs in Hong Kong that are trading at minimum spread for over 90% of the time. The analysis shows that the spread of ETPs can potentially be reduced by 50-60%.
Representative ETF
in Hong Kong Market
|
Closing Price^ |
Estimated % of Time Trading at Minimum Spread |
Average
90-day Spreads
(bps)
|
Existing Minimum Achievable Spread (bps) |
New Minimum Achievable Spread
(bps)
|
Reduction |
| ETF A |
$28.5 |
91% |
19.1 |
17.6 |
7.0 |
-60% |
| ETF B |
$113.4 |
99% |
10.2 |
8.8 |
4.4 |
-50% |
| ETF C |
$15.2 |
95% |
13.8 |
13.1 |
6.6 |
-50% |
| ETF D |
$15.3 |
95% |
13.7 |
13.1 |
6.5 |
-50% |
| ETF E |
$46.4 |
91% |
11.7 |
10.8 |
4.3 |
-60% |
* The case study is for illustration purpose only. The actual spread may differ from the minimum achievable spread
^ Source: Bloomberg, data as of 31 December 2019
What are some common uses of ETPs?
Due to ETPs versatility, investors have found both tactical (shorter-term) and strategic (longer-term) uses for ETPs. Here are some of the more commonly used strategies.
| Tactical Uses |
Strategic Uses |
Tactical Adjustments
Over or under-weight exposures on the basis of short-term views |
Asset Allocation
Gain long-term asset allocation among primary asset classes such as equities, fixed income and commodities
|
Cash Equitisation
Use ETPs to invest surplus cash to maximise returns and/or minimise cash drag |
Sub Asset Allocation
Strategic tilts within asset classes such as small capitalisation stocks |
Interim Beta
Access market exposure while evaluating managers or refining strategic investment view |
Liquidity Management
Ability to refine portfolio positions without impacting longer-term holdings or gain quick access to liquidity for unexpected and immediate needs |
Leverage / Inverse Investing
Capitalise on short-term market movements with leveraged or inverse (short) investing |
Portfolio Completion
Fill gaps to desired allocation with exposure to specific areas of the market |