On June 10, 2016 right before 15:00 in Hong Kong, HSBC (5 HK) was trading between HKD 49.8 and HKD 50.15, which represents a volatility of about 0.7%. When the London market started at 15:00 Hong Kong time, the HSBC stock price dropped as much as 1.2% (HKD 49.85 to as low as HKD 49.25) together with the dual listed shares (HSBA LN) until market close at 16:00.
Rewinding back 4 months, on February 5, HSBC (5 HK) was trading between HKD 52.15 and HKD 52.75 for the whole day, which represents a volatility of about 1% volatility. In the last one hour of trading, the stock was traded in a narrower band of HKD 52.25 and HKD 52.55, which is about 0.5% volatility. Unlike June 10, the London market started after Hong Kong close on February 5 at 16:00 due to daylight saving.
In the above examples, the Hong Kong stock market experienced higher price volatility when London had an overlapping trading period. Is this a consistent behavior? Does London provide additional information for price discovery that drives higher price volatility? Is trading volume in Hong Kong also affected?
Figure 1. HSBC stock prices on June 10, 2016. 5 HK vs HSBA LN. Source: Bloomberg.
Figure 2. HSBC (5 HK) stock prices on February 5, 2016. Source: Bloomberg.
To investigate the impact of market information from London on the Hong Kong equity market, we looked at two years of historical data of HSI index members as of June 1, 2016. During this period, the London Stock Exchange had one hour of overlap with Hong Kong stock exchange in the following periods due to daylight saving:
June 1, 2014 to October 26, 2014
March 29, 2015 to October 25, 2015
March 27, 2016 to June 1, 2016
On other days, the London market starts after Hong Kong close. Days with and without daylight saving will give us the sample to identify the impact of the London market. Another sample is the London holidays during the overlapping period. On those days, the London market was closed and Hong Kong market was open even though they are in the overlapping calendar period. Overall, we compared two sets of sample:
Overlapping period (excluding London holidays) vs non-overlapping period due to daylight saving
London holidays vs non-holidays during the overlapping period
To measure the impact on stock prices, we considered the volatility percentage, which is calculated as
Volatility percentage = (Last hour high price – Last hour low price) / (Day high price – Day low price)
Volatility percentage is always between 0% and 100%. When it is high, it means that the final hour contributes substantial amount of volatility to the stock movement.
We first compared the average volatility percentage during the overlapping period, non-overlapping period and London holidays in Figure 3. It is obvious that the last hour of Hong Kong trading experiences higher volatility when London is overlapping. The impact is more substantial when comparing to London holidays where volatility percentage is 6% higher.
In Figure 4, we compared the difference of average volatility percentage for each stock. A positive difference means higher volatility percentage on overlapping days. Out of 50 index members, a majority 38 of them (76%) had a higher volatility percentage when London came in. This is not only contained to dual-listed stocks such as HSBC (5 HK and HSBA LN), but also non-dual listed ones. In particular, Bank of China (2388 HK) had the largest difference even though it is not listed in London. The differences on London holidays were more substantial than regular non-overlapping days across all stocks.
Figure 3. Average volatility percentage on overlapping days, non-overlapping days and London holidays. Source: Bloomberg Tradebook
Figure 4. Difference in volatility percentage for each HSI index members. Positive difference represents higher volatility percentage on overlapping days. Source: Bloomberg Tradebook.
To measure the impact on volume, we considered the volume percentage in the last hour of Hong Kong trading as
Volume percentage = Last hour volume / Day volume
Our goal is to investigate if there is a significant shift in the volume profile in the final hour when London comes in. Figure 5 compares the average volume percentage on overlapping days, non-overlapping days and London holidays. Unlike price volatility, the impact on volume profile was not significant. In fact, the average volume percentage on overlapping days was even higher than non-overlapping days for about than 0.5%. The difference on London holidays is more significant at about 1.5% higher on overlapping days.
For each stock, we compared the difference of average volume percentage between overlapping and non-overlapping days in Figure 6. Positive difference represents a higher volume percentage on overlapping days. Out of 50 stocks, 21 of them (42%) had a higher volume percentage on overlapping days. It is not clear whether London market participants help in pushing a higher volume in the final hour of trading on a regular basis.
The impact is more significant on London holidays where 29 stocks (78%) had a lower volume percentage. Similar to the price impact, this was not only observed from dual-listed stocks, but also the non-dual listed ones.
Figure 5. Average volume percentage on overlapping days, non-overlapping days and London holidays. Source: Bloomberg Tradebook.
Figure 6. Difference in volume percentage for each HSI index member. Positive difference represents higher volume percentage on overlapping days. Source: Bloomberg Tradebook.
Price Discovery And Volume Profile Shift
When the London market opens during Hong Kong trading hours, our studies show that the new information leads to an increase in the price discovery activities in Hong Kong, which results in driving the volatility up significantly. This phenomenon is more substantial when comparing the London holidays in the overlapping calendar period. For price sensitive strategies, such as an arrival price algo, the last hour in Hong Kong becomes critical when it is overlapped with the London market. Higher price volatility could result in higher risk and uncertainty to the execution. Success in managing the risk and outperforming the benchmark price will illustrate the value added by buy side traders.
On the other hand, the volume profile does not appear to shift on overlapping days unless it is a London holiday. For schedule based strategies, such as a VWAP algo, prediction of volume profile in Hong Kong should be adjusted on those special days to accommodate the change in trading activities that are affected by the London market participants.