Hong Kong Exchanges and Clearing said on December 15 its CEO, Nicolas Aguzin, would not renew his three-year contract when it expires in May 2024.
His single term in office coincided with macro headwinds – economic downturns, geopolitical tensions, Beijing political campaigns – that were beyond the ability of HKEX to control.
This has put a crimp in HKEX’s mainstay of listing mainland Chinese companies. The HKEX share price has declined by 47 percent during Aguzin’s term, from HK$485 on May 1, 2021, to HK$257 as of December 20. (The exchange reports revenues and profits rebounded strongly in the first nine months of 2023.)
Not all of this can be laid at the feet of the exchange or its chief executive.
But Aguzin – or “Gucho”, as he likes to be called – has also left the exchange’s technology strategy at sea. He, and the board he reports to, have not developed its data services to provide a counter-cyclical buffer for when revenues from primary listings dry up, and have not formulated a strategy for digital assets.
HKEX disputes this. A spokesman says:
“HKEX has made significant strategic progress under the leadership of CEO Nicolas Aguzin and the HKEX management team. During this two-and-a-half year period, global markets have been weak, but the Group has reported some of its best results ever, driven by the company’s strategic diversification and its strong financial management, while ensuring the robustness and resilience of our systems. The Group has launched a large range of new initiatives including Swap Connect, FINI, and the trading of derivatives during public holidays. HKEX is financially and strategically well-placed to meet both the challenges and take advantage of the opportunities ahead.”
Critics argue, however, the new leadership team should prioritize streamlining and expanding the tech stack if HKEX is to rank among the top tier of global exchanges.
The CEO’s mandate
Aguzin joined as CEO in May, 2021 from J.P. Morgan, where he had been CEO of Asia Pacific and then of its international private bank. An Argentine with presidential hair and a banker’s smooth confidence, but who doesn’t speak Chinese, he was a good choice when the idea of the role was to expand HKEX’s businesses and clientele throughout the Global South.
In other words, the board, chaired by Laura Cha, seemed to take HKEX’s extraordinary success in primary listings for granted. A CEO like Gucho was there for conquering new worlds.
What might that look like? Aguzin made plenty of speeches about his vision for China’s capital markets growing to $100 trillion in capitalization within ten years, assuming steady growth of the mainland economy and the shift of household wealth from savings and property to stocks and bonds.
HKEX’s role would be to leverage the Greater Bay Area to turn its retail market from serving a population of 7 million to one of 86 million, including via initiatives launched by Aguzin’s predecessor such as Stock Connect.
“Humanity has never seen that capital-market value creation in securities,” he said in 2022 during one of several times DigFin heard him speak.
Unfortunately, humanity is still waiting. Perhaps the vision is correct and Aguzin had the bad luck of seeing his term derailed by Covid, China’s tech crackdown, and worsening tensions with the US.
His term ends on a humiliating note, with India’s National Stock Exchange overtaking HKEX’s market size in November, valued at $3.989 trillion versus Hong Kong’s $3.984 trillion.
One of the reasons NSE is now bigger is that its tech stack enables round-trip trades that can be counted in microseconds. It is becoming a popular venue for high-frequency traders and other quants. These players generate a lot of liquidity.
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Hong Kong can’t compete for this kind of money for two reasons. One is out of HKEX’s hands: the government imposes a 26-basis point stamp duty on round-trip equity trades. But the other reason is doubts that HKEX’s systems couldn’t keep up with the real-time data feeds that algorithmic traders require.
That’s according to technology vendors and consultants who spoke with DigFin on background. HKEX disputes the assertion that its systems couldn’t meet such needs.
This points to a big mess behind the scenes at HKEX. It’s not just one mess, though, it’s three.
First is data. Second is systems integration. Third is digital.
‘Project Omega’ is the internal name for the data warehouse and data streaming. HKEX has grown through acquisition, so data for various businesses lives in different formats. This hampers the effectiveness of monetizing data through services.
Other changes are well ahead in terms of data and connectivity contribution to revenues. For US firms such as New York Stock Exchange and Nasdaq, data-related business count for up to a third of revenues: Nasdaq’s 2022 results showed Software-as-a-Service revenues represent 36 percent of its annualized recurring revenue. SGX recorded 17 percent of revenues from non-core businesses (albeit with a primary-listings business that’s tiny).
But in 2022, HKEX reported data and connectivity contributed to only 5.9 percent of revenues. That was up from its lowest point in 2021 (when data comprised only 4.9% of revenues), but that increase is because other sources of revenues, such as listing fees, fell. Overall the picture is one of neglect: data accounted for 6.5 percent of revenues back in 2017.
“The exchange hasn’t diversified,” says a consultant. “There’s no culture of fostering innovation or using data, while US exchanges have doubled down on non-core technology businesses.”
That’s not the complete picture, of course: HKEX has grown its derivatives and exchange-listed products business. A lot of its 2023 revenue growth comes, however, from rising interest rates, which benefit funds it sets aside for margin and clearing.
The second, related, mess is integration. Because of HKEX’s history of building off acquisitions, it continues to manage separate matching engines for its cash and its futures arms.
The futures arm relies on a Nasdaq system, while the cash arm uses Orion Trading Platforms, which HKEX has customized extensively.
A longstanding internal project called ‘Project Orion’ is meant to shift the derivatives business off Nasdaq and integrate it onto Orion. Inertia, legacy relationships and fears of executives losing jobs or turf have bogged this down.
In December 2021, Aguzin brought in a J.P. Morgan colleague, John Buckley, first as head of operations and transformation, and then as co-chief operating officer. Sources say Buckley’s mission was to radically overhaul tech and operations. He reportedly wanted to bring in KX Systems, the relational database provider used by Citadel – where Buckley had also served as Asia COO.
For whatever reason, these initiatives didn’t go anywhere, and Buckley left after only one year.
One vendor suggests the price tag of a full-blown transition of core systems scared the board, noting such a move could cost anywhere from $15 million to $25 million.
The picture isn’t all negative. HKEX in November rolled out a new settlement system for primary listings, called FINI, for Fast Interface for New Issuance. This moves settlement from T+5 to T+2 for any new IPOs. It was originally slated for 2021 (as a T+1 solution), then 2022. Now it’s here, with more automation. Good, but how good, given the US is moving to T+1 in May 2024?
The third mess at HKEX is digital, specifically blockchain-based tech. The exchange has achieved one success, Synapse, a blockchain-based tool to smooth the way for US-based institutional investors to participate in Northbound flows of Stock Connect, the pipes that enable mainland and Hong Kong investors to trade each other’s shares. Synapse was expensive; given the macro environment, flows through StockConnect have been disappointing.
Over time, Synapse may prove its worth. But it was achieved in isolation, to solve a particular problem.
This seems like a missed opportunity given the Hong Kong government’s recent embrace of digital assets. The Securities and Futures Commission has now licensed seven virtual-asset service providers. The Hong Kong Monetary Authority is weighing a strategy for stablecoins.
Sources familiar with HKEX say its executives are justifiably keen to avoid the costly and humiliating failures at Australia Stock Exchange, which for years labored to replace its post-trade infrastructure with a blockchain-based design. HKEX can point to FINI as evidence it has updated its post-trade systems in a sensible manner.
But FINI is still ‘TradFi’ tech. HKEX has also ignored successes with next-generation digital tech at Depository Trust and Clearing Corporation, Chicago Board of Exchange, CME, and the acquisition by NYSE’s parent, Intercontentinal Exchanges and Clearing, of stakes in Coinbase, Bakkt, and Black Knight, a mortgage-tech business.
One digital-asset executive says HKEX could lobby the government to digitize the company registry system, to enable the trading of shares on blockchain rails in a private market; Switzerland has allowed this, for example, by recognizing the legal issuance of securities on blockchain.
Creating a blockchain-based registry could enable instant settlement of shares, both public and private, which should generate new sources of liquidity. “HKEX is exploring ESG or private markets on blockchain but they can’t go far with their existing systems,” he told DigFin.
No Plan B
Sources paint a picture overall of an organization that has no Plan B should primary listings from mainland China hit a dry spell. There is no guarantee that the macro picture will improve in 2024.
“Tech is the heart of their problem,” says a vendor. “They’ve tried to invest in different things but can’t stick to a plan. This is what’s keeping HKEX in the second tier [of global exchanges].”
Efforts to modernize technology have been half-hearted and focused on projects such as Synapse that help extend the core listings business. Integration projects get tangled in internal politics. A cadre of managing directors, perhaps fearing their jobs, aren’t aligned. Owners of various systems and data stores too focused on defending their turf.
To whatever extent Aguzin thought about tech, he wasn’t able to create a vision that key executives could buy into, nor a culture that executes well on existing projects such as systems integration and heavy lifts like Orion. Key people who were brought into the organization to effect change haven’t lasted long. Maybe Aguzin was too much of an outsider to drive such change internally; or his remit was always on growing a primary-markets business at a time when that became untenable.
A new chance
The good news for HKEX is that there’s no reason why it can’t put resources behind a comprehensive upgrade of its tech stack. The digital movement is still nascent, so there’s time for HKEX to wade into the space. Big projects such as the transition to Orion, however, need leaders that know how to work constructively with management, and they need the support of the board. Aguzin’s exit and that of Laura Cha as chairwoman, set for April, gives HKEX an opportunity.
The incoming new leadership is held in high regard, according to sources.
Bonnie Chan Yiting will become the new CEO. Her background is legal: she joined in 2020 after serving as partner at Davis Polk & Wardell. On the one hand, she has only been at HKEX a little longer than Aguzin, serving first as head of listings and then co-COO. But she’s not an outsider: she was HKEX’s head of IPO transactions in the listing group from 2007 to 2010.
Chan will be supported by Wilfred Yiu Ka-yan, who will become deputy CEO after having served alongside her as co-COO. Yiu will be the key figure in any tech or digital transformation, particularly the integration of matching engines. He retains two CEO roles within the organization, heading The Stock Exchange of Hong Kong and the Hong Kong Futures Exchange. Before joining HKEX in 2019, he was a Goldman Sachs executive, serving as deputy CEO of its mainland China partner, Beijing Gao Hua Securities, as well as an earlier role as managing director of Goldman’s Fixed Income, Currencies and Commodities business.
The third elevated leader is Vanessa Lau, the group CFO; she will continue in that role as well as become co-COO.
Sources tell DigFin it is probably good that the trio is not from the IT and operations arms of the group. They have an opportunity to formulate a strategy that they can present to whoever chairs the board.
HKEX has been enormously successful at serving as the global exchange for mainland companies. This has been central to Hong Kong’s role as a platform for China’s economy; it’s the raison d’être for the territory.
In all aspects, Hong Kong is better served if HKEX modernizes its tech stack, positions itself as a serious player in data, builds the infrastructure to attract liquidity providers, positions itself as the world’s biggest platform for digital assets, and diversifies its business to ride out inevitable downturns.