House of the year, Hong Kong: Haitong International

Asia Risk Awards 2018

Duke Du, Haitong International Securities

Volatility is a very positive dynamic for sharp investors with the right set of investment tools, and over the past year, Hong Kong-based investors were among those who experienced fluctuations. The rise in volatility also brought increasing demand for structured products.

Haitong International’s flow instrument volumes rose 2.5 times year-on-year, in no small part tied to turbulent activity, according to data compiled by Bloomberg. In the warrant space, money inflows represented 9.5% of the market over that 12-month period, while Vega outstanding stood at 8% of the market.

“For the past 12 months, Hong Kong and the regional markets have been facing a “rollercoaster ride”,” says Duke Du, executive committee member and managing director of Haitong International Securities Company.

“Since last year, the launch of Bond Connect, new rules on weighted voting rights (WVR), allowing [a] pre-profit company to list in HKEx (Stock Exchange of Hong Kong) and [a] couple of red-hot initial public offerings (IPOs) have led the local market to approach its new ascent. However, since February, the outbreak of [a] Sino-US trade war, anxiety about geopolitical risk and [a] US Fed fund-rate hike that resulted in emerging markets turbulence have brought the market sentiment to the valley,” he says.

Haitong International has given confidence to clients through its breadth of activity and its quantitative approach to assessing the market, and finding opportunities and products that will best support its customer base.

“In Asia, we see a market divided by mature European and US banks vs the emergence of the local institutions,” says a client of the firm. “Haitong International has stood significantly taller in recent years than its peers, with a strong pipeline of product offering[s], particularly in the warrant space. The company has emerged as a very strong competitor, having built out their capabilities across products, technology and trading.”

The firm’s warrants business covers 194 underlying assets – the most among banks in Hong Kong and well above the industry average of 117. It has worked to build a range of different thematic investment products that help to manage investment goals across various economic circumstances and market conditions.

Expertise in stock selection

It is not only Haitong’s broad range of underlying assets that is viewed as a competitive edge, but also the firm’s expertise in stock selection, bringing new opportunities to market from corners that issuers have not ventured into. Key to this is the firm’s investment in big data technology, which allows it to analyse every transaction in the HKEx cash market, looking at everything from trade volumes to tick data to support client investment decisions.

“We have developed a proprietary stock-classification model that helped us to identify the so-called ‘cheater stocks’ in the Hong Kong stock market,” says Du. “This helps the bank steer clear of investing in such stocks or accepting them as collaterals in its margin-lending business. Data input of the model includes both quantitative factors, e.g. company fundamentals, market factors, peer comparison, and qualitative factors, such as corporate actions related to equity manipulation, e.g. stock splits, mergers, placements, rights; and an external view via the Securities and Futures Commission high shareholding concentration list, as well as their combined effects.”

This data is processed by Haitong International through a filter of decision trees and machine-learning technology. The final result is assigned a score, which the firm uses to determine whether the stock is good or bad, and a loan-to-value (LTV) ratio is assigned for the margin-lending business.  

“We believe this advanced technology provides us with an edge” over competitors in the market. Most of the competing brokerage houses are “still using [the] simple, intuitive, few-factors model to come up with a LTV ratio”, Du says.

Haitong offers continuous quoting of more than 1,000 listed structured products on HKEx and it has developed a request-for-quote (RFQ) service for clients who want to trade large blocks. The firm reports that by providing a rapid response to RFQs, institutional clients with a need for strong execution capabilities are willing to trade continually in blocks.