Erosion risks

• Regulatory reform enabling competing venues or expanding off-exchange execution
• Tighter fee controls or political pressure on exchange economics
• Sustained decline in cash market turnover and IPO pipeline

Leading indicators

• SFC consultations or rule changes on market structure and fee schedules
• Trends in average daily turnover and number of trades
• Share of trading migrating to alternative channels (where available)

Counterarguments

• Capital raising can migrate to other global exchanges if issuer/investor preferences shift
• Regulators can constrain fees and market design, limiting monopoly monetization

Erosion risks

• Technology or operational incidents impacting settlement reliability
• Policy changes reshaping post-trade architecture
• Fee pressure on depository/custody and settlement services

Leading indicators

• System uptime and incident reports for clearing/settlement systems
• Clearing and settlement fee growth vs market activity
• Changes to margining, risk management, or CCP rules

Counterarguments

• Post-trade functions are highly regulated and can be restructured by policy
• Some participants can reduce dependency via netting, internalization, or cross-venue strategies

Erosion risks

• Policy or rule changes by regulators affecting Connect eligibility, quotas, or fee splits
• Alternative cross-border access mechanisms reducing Connect growth
• Geopolitical escalation reducing cross-border participation

Leading indicators

• Northbound and Southbound ADT trends
• New Connect products or expansion of eligible securities
• Regulatory announcements affecting Connect mechanics

Counterarguments

• Connect economics and rules are not fully under HKEX control
• China access can be obtained through other instruments (ETFs, offshore listings, derivatives)

Erosion risks

• Liquidity fragmentation via alternative venues and internalization
• Issuer migration to other jurisdictions or venues
• Structural decline in retail participation

Leading indicators

• Headline ADT and order-book depth metrics
• IPO proceeds and number of new listings
• Market-wide bid-ask spreads and volatility

Counterarguments

• Network effects can weaken if trading activity becomes globally substitutable or fragmented
• Macro and China-related sentiment can drive sharp cyclical swings in liquidity

Erosion risks

• Regulatory restrictions on product design, fees, or market access
• Shift of derivatives activity to offshore venues or OTC substitutes
• Technology change lowering switching costs

Leading indicators

• Derivatives ADV and open interest trends
• Launch success of new contract suites
• Regulatory approvals and rule changes affecting derivatives markets

Counterarguments

• Global derivatives liquidity can migrate to larger international venues for certain products
• OTC derivatives and synthetic exposures can substitute for exchange-traded contracts

Erosion risks

• Clearing disruptions or risk-management failures damaging trust
• Regulatory changes to margining, default funds, or CCP governance
• Participants concentrating activity where cross-margining is superior

Leading indicators

• Default fund changes and stress test disclosures
• Clearing participant counts and concentration
• Clearing volumes and open interest concentration

Counterarguments

• Large global CCPs can be more attractive for multi-asset cross-margining
• If key products lose liquidity, clearing advantages weaken

Erosion risks

• Liquidity shifting to competing contracts or venues (including Mainland or US-listed products)
• Market microstructure changes reducing on-exchange liquidity
• Retail participation decline in options

Leading indicators

• ADV and OI by product suite (e.g., TECH Index Futures/Options, stock options)
• Bid-ask spreads and order-book depth
• Market maker participation and incentive spend

Counterarguments

• Liquidity can be product-specific and can shift if a benchmark index loses relevance
• Cross-listed or offshore derivatives can siphon activity when basis or fees are favorable

Erosion risks

• Loss of trust in price discovery after extreme market events
• Competition from other exchanges and onshore price benchmarks
• Regulatory interventions affecting contract design or benchmark administration

Leading indicators

• LME traded volume and open interest by metal
• Share of physical contracts referencing LME prices (where observable)
• Benchmark or regulatory actions related to LME price administration

Counterarguments

• Some markets can migrate to regional benchmarks (e.g., onshore China) over time
• If liquidity thins in key contracts, benchmark relevance can decline

Erosion risks

• Operational constraints or cost inflation in warehousing network
• Regulatory changes impacting delivery rules
• Market preference shifting to non-deliverable or alternative settlement structures

Leading indicators

• On-warrant inventory levels and cancelation rates
• Delivery volumes and queue dynamics
• Expansion or attrition of approved warehouse locations

Counterarguments

• The LME does not own warehouses; operators can influence economics and reliability
• New regional delivery networks or onshore contracts can compete for physical relevance

Erosion risks

• Liquidity migration to rival venues or OTC markets
• Reduced industrial hedging demand due to structural industry changes
• Member consolidation reducing competitive trading dynamics

Leading indicators

• Chargeable ADV and open interest trends
• Number of active members and ring or electronic participation
• Spread behavior and volatility around benchmark windows

Counterarguments

• Liquidity can be sensitive to fees, margin, and policy changes
• A major market incident can cause lasting reputational and volume damage

Erosion risks

• Regulatory or customer pressure on market data and connectivity fees
• Technology shifts that reduce the value of low-latency hosting
• Cybersecurity incidents impacting trust and usage

Leading indicators

• Network fee growth and hosting subscription counts
• Adoption metrics for new gateways and platforms (e.g., Orion platform migrations)
• Customer concentration in hosted turnover and volume

Counterarguments

• Data vendors can intermediate end-user relationships and negotiate pricing pressure
• Regulators can intervene in market data and access economics

Erosion risks

• Participants consolidating and renegotiating fees
• Emergence of alternative access architectures
• Latency arms race shifting to other venues or strategies

Leading indicators

• Number of hosting customers and churn
• Share of market turnover or volume generated by hosted participants
• System performance metrics and latency benchmarks

Counterarguments

• Some participants may multi-home across venues, limiting lock-in
• Fee hikes can trigger optimization to reduce connectivity usage