Hong Kong Futures Exchange Limited
Migration of Trading of
Hang Seng Index Futures and Options Contracts to
(Hong Kong Futures Automated Trading System)
This paper has been prepared by the Hong Kong Futures Exchange ("the Exchange") at the request of the Financial Services Bureau of the Government of the Hong Kong Special Administration Region for discussion by the Legislative Council Panel on Financial Affairs at a meeting to be held on 3 May 1999.
In April 1997, the Board of Directors of the Exchange, in consideration of future business development, decided that all new futures and/or options contracts introduced on the Exchange would be traded in an automated environment. Further, the Board articulated its vision that the Exchange should, when conditions were perceived to be correct, become a fully automated marketplace. To realize this vision meant that sometime in the future the trading of the Hang Seng Index ("HSI") futures and options contracts would have to be migrated from the open outcry environment to an electronic order matching environment.
At the time such decision was made, the Board was cognizant of the fact that no exchange in the world had attempted to move the trading of a high volume established futures and/or options contract from open outcry to electronic order matching or vice versa. Thus, the Board had no historical precedent upon which to evaluate how trading of HSI futures and options products would be affected by a change in their trading environment. Consequently, the Board felt that further study of the acceptability by
Members and their clients of electronic order matching were necessary before a final decision to migrate HSI products was taken.
In September 1997, the Exchange introduced trading of Red-Chip futures and options on its then active Automated Trading System known as ATS. The introduction of the Red-Chip products on ATS provided the Exchange with information and insight as to the acceptability of electronic order matching of equity index based futures and options trading in its marketplace. Based on such information and insight, the Board, in December 1997, decided that it was the appropriate time to commence the process to migrate the HSI futures and options products to electronic order matching and initiated a survey of the membership to confirm its decision.
Further, in taking such decision, the Board was cognizant that the Exchange's ATS was not the suitable platform to trade HSI products. Consequently, a new electronic trading system would need to be developed before the migration could be completed.
The Exchange's survey of the 118 Members who were actively trading HSI futures and options contracts in December 1997, asked Members if they agreed with the Board's view that the Exchange should take immediate steps to prepare for the migration of the HSI products from the open outcry to electronic order matching. One hundred thirteen (113) Members responded to the survey with eighty-six (86) Members (77 percent) agreeing.
In January 1998, the Board re-confirmed its decision to migrate the trading of the HSI products to electronic order matching and the membership and public were advised the migration process be scheduled to be completed in 18 to 24 months.
In April 1998, the Financial Services Bureau issued its "Report on Financial Market Review" ("Report") in the aftermath of market events in October 1997. Paragraph 4.76 of the Report states:
"In conclusion, we believe that trade automation is the right direction to which the Hong Kong securities markets including the HKFE should move and support the policy decision of the HKFE Board of Directors in April 1997 to introduce all its future products on the ATS. We also welcome the recent decision of the HKFE to migrate its HSI futures and options trading from open outcry to ATS …"
On 7 September 1998, the Financial Services Bureau tabled a Note before the Legislative Council Panel on Financial Affairs entitled "Measures to Strengthen the Order and Transparency of Securities and Futures Markets" in which the Exchange was urged to specify the timetable for the advanced migration of HSI production from open outcry to ATS.
Development, Installation and Testing of the New Automated Trading System (HKATS)
In February 1998, the Exchange in conjunction with its electronic trading software developer, OM Technology AB, Stockholm, Sweden began planning for the development of HKATS. The development plan called for HKATS in a test environment to be ready for use in the street-wide Y2K test scheduled for January 1999 as such system would be in operation for trading of most if not all of the Exchange's products at the turn of the century.
A summary of the major milestones, which lead up to, HKATS being brought into production on 19 April 1999 as the Exchange's electronic trading platform are as follows:
May 1998||-||hardware and network architecture design completed.
|July 1998||-||construction of new "class A" data centre on fifth floor of Asia Pacific Finance Tower completed.
|September 1998||-||installed new computer hardware.
|September 1998||-||construction of new electronic trading market centre on the sixth floor of Asia Pacific Finance Tower completed.
|November 1998||-||installed the new electronic trading software into the new computer system.
|Mid-December 1998||-||completed installation of the communication network at 82 Members' offices.
|Mid-December 1998||-||completed initial system functionality, failover, stress and integration tests.
|End-December 1998||-||conducted first round of system-wide simulated trading test with 82 Members participating.
|January 1999||-||used new system as electronic trading platform for first street-wide Y2K tests.
|February 1999||-||conducted second round of system-wide simulated trading test with 91 Members participating.
|March 1999||-||conducted third round of system-wide simulated trading test with 97 Members participating.
|March 1999||-||used new system for second street-wide Y2K tests.
|Early April 1999||-||completed system functionality, failover, stress and integration tests and conducted fourth round of system-wide simulated trading test with 109 Members participating.
|19 April 1999||-||HKATS brought into production for the trading of Red-Chip, HS100 and Taiwan Index futures and options, One-Month and Three-Month HIBOR futures, Stock Futures and Rolling Forex.
Between mid-November 1998 and mid-April 1999, the Exchange's 20-person team assigned to test HKATS to ensure it was ready for production spent, on average 13.5 hours per day, six (6) days a week performing various functionality, failover, stress and end to end regression tests. In addition, the Exchange's HKATS test plans, procedures and functions were reviewed by two different independent consulting organizations and found to be in accordance with internationally accepted best practice.
At present, HKATS is being reviewed by a third consulting organization (PricewaterhouseCoopers) to certify that it is ready for the migration of HSI futures and options.
Major Features of HKATS
The major features of HKATS are as follows:
Members' Readiness for Migration of HSI Futures and Options to HKATS
- Compaq Alpha Server 1200 back-end that has processing power 10 times greater than the Exchange's original electronic trading system;
- Distributed open VMS clusters operating system;
- Transparent failover capability;
- Standardized front end platform using Windows NT;
- Higher bandwidth network with a transmission rate up to 200M Bit per second;
- Member connections using dual 128K datalines provided and maintained by Hong Kong Telecom;
- HOT off-site backup with automatic failover in the event of machine failure or process crash;
- Four layer client/server architecture; and
- Year 2000 compliant.
At present, there are 116 Members trading HSI futures and options directly. One hundred ten (110) of such Members are connected to HKATS and trading the various markets available to the system. Another six (6) Members are in various stages of being connected.
Further, there are approximately 1,850 employees of Members who are qualified to trade on the Exchange's electronic markets. Since the first of the year, the Exchange has conducted 23 HKATS training classes and over 300 Member employees have participated in these classes. Additionally, 26 HKATS practice sessions have been held for 330 Member employees. The HKATS training and practice sessions held so far this year have afforded Member employees with over 2,345 hours of hands-on operation of the front end software.
During May 1999, an additional four (4) HKATS training classes and ten (10) practice sessions are scheduled with a further 250 Member employees scheduled to participate.
The Board has set up a Special Committee to:
- review the Exchange's electronic trading rules and procedures to ensure that they are appropriate for the trading of HSI futures and options on HKATS and to recommend amendments to such rules and procedures if necessary;
- review Member's readiness for migration, and;
- recommend the dates for migration.
The Board has already announced to the membership that the migration will occur in two phases, beginning with HSI futures and followed by HSI options four (4) to six (6) weeks later.
The Special Committee's work has been progressing well and is expected to be completed in early May 1999. Thereafter, the Board will consider the Special Committee's recommendations.
As previously noted, PricewaterhouseCoopers is conducting a review of HKATS to ensure the system is ready for HSI futures and options migration. The report on this review will be completed also in early May 1999.
Once the Special Committee's work and the PricewaterhouseCoopers' report are completed, the Board will address the actual dates of migration. Naturally, before the migration can become effective, the Securities and Futures Commission will have to grant approval. In this regard, the Exchange has and will continue to work closely with the staff of the SFC to ensure that the migration of the Exchange's most important products occurs without interruption.