Hong Kong's Trading Unit Reform: A Catalyst for Liquidity and Investor Inclusion

Hong Kong's financial markets are undergoing a transformative phase, driven by a series of reforms aimed at modernizing trading mechanisms and enhancing competitiveness. At the heart of these changes is the adoption of a "one share per lot" trading unit system, a move that aligns the city's stock market with global standards and addresses long-standing inefficiencies. This reform, alongside adjustments to IPO allocation rules and broader market infrastructure upgrades, is poised to reshape liquidity dynamics and investor participation, particularly for retail and institutional players.

Strategic Modernization: Aligning with Global Standards

The "one share per lot" system, set to be phased in by early 2026, marks a departure from Hong Kong's historically fragmented trading lot sizes, which numbered over 40. By enabling investors to trade individual shares, the reform eliminates the problem of odd lots-small, non-standardized holdings that often trade at discounts and limit liquidity for retail investors. This shift mirrors practices in markets like the U.S., U.K., and Singapore, where granular trading has long been a feature of robust equity markets.

The reform's primary objective is to lower investment thresholds, democratizing access for small investors while also enhancing portfolio flexibility for institutional players. For example, retail investors can now allocate capital more efficiently across diversified portfolios, while institutions gain precision in executing trades, particularly for frequently traded Chinese concept stocks. This dual benefit is critical as Hong Kong seeks to attract both domestic and international capital amid competition from Singapore and U.S. markets.

IPO Allocation Reforms: A Double-Edged Sword

Parallel reforms to IPO allocation rules, effective from August 2025, have recalibrated the balance between institutional and retail investors. Under the new framework, institutional investors are guaranteed a minimum 40% allocation in hot IPOs, while retail allocations are capped at 35% under Mechanism A and 25% under Mechanism B. These changes indirectly limit the cornerstone placing tranche to 55% or 50%, depending on the mechanism.

While these adjustments aim to stabilize pricing and reduce volatility in oversubscribed offerings, they have sparked debate. Critics argue that retail investors, already marginalized in high-demand IPOs, now face heightened competition. For instance, the Dahon Tech IPO saw 7,558 times oversubscription, with retail investors receiving only 35% of shares. This trend risks deterring small investors from participating in IPOs, potentially undermining Hong Kong's goal of broadening market inclusivity.

However, proponents highlight that the reforms optimize price discovery and reduce the risk of underpricing, which historically favored retail investors but often led to post-listing volatility. By prioritizing institutional allocations, the market may achieve more stable valuations, benefiting long-term liquidity and investor confidence.

Liquidity and Market Depth: A Boon for Institutional Investors

The "one share per lot" system is expected to amplify market depth by enabling more precise trading. For institutional investors, this means greater flexibility to adjust portfolios in response to market fluctuations, particularly as Chinese companies listed overseas return to Hong Kong. The ability to trade individual shares allows for finer-grained hedging and position management, reducing transaction costs and improving execution efficiency.

Moreover, the reform complements other infrastructure upgrades, such as the transition to a T+1 settlement cycle and the development of a post-listing over-the-counter trading mechanism. These changes, combined with a 40% year-on-year increase in average daily turnover in 2025, underscore Hong Kong's growing role as a hub for global capital allocation.

Retail Investor Participation: A Path to Democratization

For retail investors, the "one share per lot" system represents a significant step toward democratizing access. By eliminating the need to trade in fixed lot sizes, small investors can participate in the market with minimal capital, fostering broader financial inclusion. This is particularly relevant as Hong Kong seeks to attract returning Chinese concept stocks, where retail investors can now trade smaller quantities and respond more dynamically to market movements.

However, the challenge lies in balancing accessibility with fairness. While the reform lowers entry barriers, the recent IPO allocation shifts risk concentrating benefits among institutional players. To mitigate this, regulators must ensure that retail investors are not entirely excluded from high-profile listings, perhaps through targeted incentives or enhanced transparency in allocation processes.

Broader Implications for Hong Kong's Financial Ecosystem

The cumulative impact of these reforms is evident in Hong Kong's 2025 IPO market performance. Total fundraising reached HKD 77.361 billion by June, a 714% year-on-year increase, driven by streamlined processes and dedicated channels for biotech and tech firms. The introduction of a "Technology Enterprise Channel" and expanded cross-border connectivity further solidifies Hong Kong's position as a gateway for innovation-driven capital.

Additionally, the government's review of stamp duty rates-currently at 0.1%, higher than many international benchmarks-signals a commitment to reducing transaction costs and attracting inflows. With a net inflow of over HKD 600 billion in 2025, these measures are already bearing fruit.

Conclusion

Hong Kong's trading unit reform is a pivotal step in modernizing its financial markets, enhancing liquidity, and fostering inclusivity. While institutional investors stand to gain from improved execution efficiency and market depth, retail investors benefit from lower barriers to entry and greater flexibility. However, the challenge of balancing institutional and retail interests in IPO allocations remains unresolved. As the city moves forward, sustained dialogue between regulators and market participants will be essential to ensure that these reforms not only align with global standards but also uphold the principles of fairness and accessibility that underpin a thriving capital market.