New technology permits safer, paperless, round-the-clock trading. But we need to let go of some of our old habits in order to benefit.
The technological revolution now engulfing the modern world has penetrated almost all aspects of daily life. But some cherished old practices, which seem increasingly inefficient, remain with us. This is understandable. Old habits do die hard. But, to benefit fully from technological revolution and not be left behind, we must be prepared to change some of our established practices. Change may bring short-term disruptions and inconveniences, and may even adversely affect vested interests keen to maintain the status quo. However, if we are to continue to prosper we really have no alternative but to embrace technological revolution and the changes that it necessitates, and we must to do so proactively and enthusiastically.
We all have the habit of wanting to see and touch physically whatever we want to buy. We all like to hold and feel our possessions. If this is not possible for practical reasons, we would wish instead to hold on to tangible evidence of ownership that is legally enforceable, even though this is merely in the form of a piece of paper. Indeed, where ownership is traded actively in markets and changes hands quickly, as in the case of the stocks and shares of listed companies, the existence of such pieces of paper evidencing ownership is a legal requirement. But technology has made it possible for us to enjoy the same degree of comfort of ownership, and the bonus of greater efficiency in servicing that ownership, in electronic form, without the need for pieces of paper.
The efficiency with which we can now organise things through the use of new technology, in particular information technology, is startling. The application of information technology in organising financial markets is a most interesting example. The use of electronic trading systems has made it possible for the supply and demand of financial products to be brought together and to interact much more efficiently, and the market clearing price determined much more accurately, without the physical contacts, and the frictions and errors that come with them. This has, in fact, led to the marketplace, as a physical place, becoming obsolete. Indeed, the trading floor of the Stock Exchange, elegant as it is, serves little purpose now insofar as the primary functions of the stock market are concerned. But I imagine the trading floor will continue to be with us for a long time to come. Apart from the obvious question about the efficiency in the use of prime commercial property, its continued existence is harmless and does not undermine market efficiency.
The use of electronic trading systems and the consequent disappearance of the physical limitation in the access to the market place have also accelerated the globalisation of financial markets, with market participation rapidly extending beyond the reach of any domestic jurisdiction. Investor protection and market integrity considerations aside, this raises the questions of whether there should be any limitation to the time duration of markets, or to who can participate in those markets. It seems that, as long as there are adequate safeguards to enable the transactions to be satisfactorily settled, it would be in the interest of the efficiency of the market that there should be minimal limitations on who can deal and when to deal. The foreign exchange market operates around the clock for significant, freely convertible currencies. Where there is a need for demand to be met, or supply to be offloaded, such currencies can be bought and sold at any time on a 24-hour basis. The handling of these transactions is, nevertheless, limited to banks with an international presence and within established dealing limits so as to manage the settlement risks of these transactions. But if the settlement risks could somehow be eliminated, there is no reason why anybody could not be allowed to buy and sell currencies, and indeed any financial product, within a large, liquid and efficient global market that operates 24 hours a day, directly, without going through any intermediary.
The use of technology has already made the elimination of settlement risks possible, particularly for transactions in financial products held with a centralised custodian, in the form of a computerised register. If it is possible for that register to be linked to a dealing system for that financial product and a payment system to effect money settlement, then, theoretically, dealing, payment and delivery could all be synchronised and done real time, around the clock. There need not then be any limitation on who should be allowed to deal in that market. The scope for human error could also be minimised. We already have the technology to get there. We already have some of the building blocks. One of these is the Real Time Gross Settlement (RTGS) payment system we introduced at the end of 1996. And, for the debt market, we also have the paperless clearing system of the Central Moneymarkets Unit (CMU) in the HKMA, which has already been linked to and synchronised with the payment system. Other possibilities should be explored, even if changes to long established traditions affecting vested interests are involved. We must not allow these to stand in the way of progress.
Joseph Yam
16 November 2000
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