1. What Is a “Type 1 Licence”?

The “Type 1 Licence” (Dealing in Securities) is issued by Hong Kong’s Securities and Futures Commission (SFC). It regulates those who carry out securities dealing activities (i.e. a “regulated activity”). The following activities fall under Type 1:

• Buying and selling Hong Kong stocks, stock options, bonds for clients
• Buying and selling funds or unit trusts for clients
• Underwriting or placing securities for companies (e.g. pre-IPO shares, or overseas bond issuances)

If you also want to act as a “sponsor” (helping a company list on the exchange), you must apply for a separate Type 6 licence; a Type 1 licence on its own does not cover sponsorship.

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2. “Big Type 1” vs “Small Type 1”: Two Common Market Terms

Although the SFC does not officially refer to licences as “Big 1” or “Small 1,” people in the industry often use these labels to show whether a firm can hold client assets. Briefly:

2.1 “Small Type 1 Licence”

• Can only introduce/distribute, cannot hold client assets: Clients cannot open accounts with you or deposit funds with you.
• Business model: Mostly “introduce + share commission.” You refer clients to a broker that has a proper dealing system or a “Big 1” licence; once the client completes a trade there, you receive part of the commission.
• Lower capital requirement: Commonly around HK$500,000 in liquid capital, as there is less risk.
• Recent trend: The SFC is said to have stopped granting new “Small 1” licences in recent years, so most “Small 1” licences are old ones that remain active.

Typical uses:

• A company that only wants to do client introductions and earn referral fees, without building its own trading system or holding client assets.

2.2 “Big Type 1 Licence”

• Allowed to hold client assets: Clients can open accounts with you and deposit funds in your firm’s account(s).
• Can carry out trades on behalf of clients: You can build or outsource your own trading system, enabling stock, bond, fund, or options trading for clients.
• Can offer margin/leveraged transactions: Also known as margin financing, lending to clients to buy securities.
• Higher capital requirement: Usually at least HK$4 million or more in liquid capital, since there is greater responsibility and risk.
• May apply for Trading Rights: If you want direct access to the Hong Kong Exchange, you need to place a deposit (typically HK$30 million) and pay a fee (around HK$500,000) to the HKEX.

Typical uses:

• Running a full-scale brokerage (online brokerage model, catering to retail or institutional clients)
• Holding client funds, providing margin financing, underwriting/placing new issues, etc.

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3. Further Breakdown of “Big 1”: With or Without Trading Rights

Within “Big 1,” there is an additional distinction: whether you hold direct Trading Rights (i.e. you are a direct exchange participant). In simple terms:

3.1 With Trading Rights

• Directly place orders with the HKEX: You become an Exchange Participant, connecting directly to HKEX’s trading system.
• Must deposit with HKEX + pay a HK$500,000 application fee: Also subject to more stringent system and risk controls.
• Better client experience: You can build your own online trading platform (similar to major digital brokers), offering real-time quotes, fast execution, and margin.
• Higher ongoing costs: Requires dedicated IT staff, system maintenance, risk controls, and HKEX annual fees.

Best for:

• Online brokers focusing on a large retail base who want to develop their own brand and app
• High-frequency trading or quantitative trading for institutions needing direct market access

3.2 Without Trading Rights

• Still can hold client assets: You remain a “Big 1” firm, but must route orders via a broker who has direct Trading Rights.
• Slightly lower capital requirement: You are free from having to deposit HK$30 million with the HKEX, though you must still meet the higher capital threshold required of Big 1 licence holders.
• Simpler system demands: No need to build direct connections to HKEX; you can use white-label solutions or APIs from other brokers.
• Trade execution may be a bit slower: Since orders go through a third party, but that might not be a big issue if clients don’t trade frequently.

Best for:

• Family offices, high-net-worth or institutional clients with lower trading volume
• Cross-border markets: if your main focus is overseas markets (US, Europe), you’d generally connect via other global brokers anyway

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4. Capital Requirements and Compliance

4.1 Capital Requirement Overview

Category	Capital Requirements	Holding Client Assets?	Trading Rights?
Small 1	Around HK$500,000 (relatively low)	No	Not applicable
Big 1 (No Trading Rights)	At least HK$3.6 million or more (depends on scale)	Yes	No (but can be added)
Big 1 (With Trading Rights)	Big 1 minimum plus an extra deposit for HKEX	Yes	Yes

4.2 Compliance Oversight

• Risk management and internal controls: Both Big 1 and Small 1 must adhere to SFC requirements, including filing regular financial and compliance reports.
• AML (Anti-Money Laundering) & KYC (Know Your Client): “Big 1” in particular must conduct proper due diligence on client identity and monitor suspicious transactions.
• Responsible Officers (ROs): Must have suitable industry experience and meet the SFC’s standards for integrity and compliance conduct.

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5. Choosing Your Business Model: Practical Suggestions

5.1 Who Should Opt for “Small 1”?

• Only want to do introductions: Sending clients to another broker and collecting part of the commission.
• Lower capital: Or simply preferring a light model without client asset custody.
• Fewer new licences: If you really need it, you might consider acquiring an existing “Small 1” from the market, as new ones are reportedly rare.

5.2 “Big 1”: Then Decide on Trading Rights

1. Big 1 (No Trading Rights)
   • You can hold client money, provide custody, do asset management, and margin lending.
   • You outsource actual order routing to a partner broker, saving IT complexity and the HK$30 million deposit.
   • Works well if you don’t have large trading volumes, focusing on institutional or high-net-worth clients.
2. Big 1 (With Trading Rights)
   • Directly connect to HKEX for a one-stop brokerage solution.
   • Requires an additional HK$30 million deposit, strong IT capabilities, and higher running costs.
   • Ideal for large-scale online retail brokerage or high-frequency institutional clients.

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6. Common Scenarios

1. Retail Online Brokerage
   • Must be “Big 1,” usually with Trading Rights.
   • Providing online account opening, real-time quotes, margin financing, and a branded app.
   • Capital, IT development, and compliance costs are higher.
2. Institutional / Family Office Asset Management
   • “Big 1 (No Trading Rights)” can be sufficient; you focus on custody, investment advice, and risk management.
   • Order execution is done via a partner broker, saving considerable system maintenance costs.
3. Introducing Broker / Distribution Agent
   • “Small 1” is enough if you merely want to earn referral fees for sending clients to other brokers.
   • You cannot hold client funds or open accounts yourself.
4. Cross-border or Multi-market Trades
   • Even if you have direct HKEX Trading Rights, you’ll still need overseas brokers to handle markets like US or Europe.
   • Many Hong Kong “Big 1” licence holders do not open local trading rights at all if they mainly serve global markets.

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7. Application vs Acquisition: Points to Consider

• New Application
  • Typically takes 3-6 months, depending on your company’s background, RO experience, and proof of funding.
  • You must prepare a business plan, internal risk and compliance framework, organisational structure, etc.
• Acquisition of an Existing Licensed Firm
  • Might be faster, but do thorough due diligence to ensure there are no hidden legal or compliance issues.
  • After purchase, you must notify the SFC of changes in major shareholders and ROs.

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8. Conclusion

1. “Small 1” vs “Big 1”
   • Small 1: Cannot hold client funds, can only act as an introducer, with a lower capital requirement. Few new licences are granted.
   • Big 1: Offers full brokerage services—client custody, trading, margin finance, underwriting—so requires higher capital and faces stricter regulation.
2. Further Subdivision of “Big 1”
   • With Trading Rights: Direct access to HKEX, requiring a HK$30 million deposit and more IT and compliance work, suitable for larger retail or high-frequency operations.
   • Without Trading Rights: Can still hold client assets, but uses other brokers for execution, well-suited to lower volume or institutional business.
3. How to Decide
   • Consider your target clientele, expected trading volume, and available capital.
   • For a big retail push, “Big 1 + Trading Rights” is usually necessary.
   • For a family office or pure asset management focus, “Big 1 (No Trading Rights)” is enough.
   • For simple referral brokerage, “Small 1” might be enough (though new ones are rarely issued).
4. Never Ignore Compliance & Risk Management
   • Regardless of licence type, you must comply with AML, KYC, internal controls, and ongoing reporting to the SFC.
   • If offering margin or leverage, you need robust risk controls and a clear liquidation mechanism.
   • If you wish to handle virtual asset trading, check the latest SFC regulations.

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Disclaimer

The above content is for general reference only and does not constitute investment or legal advice. For formal advice, please consult qualified lawyers, compliance professionals, or other experts. Whether you apply for or acquire a licence, you should conduct proper due diligence and risk assessment to ensure compliance with the SFC and other relevant legal requirements in Hong Kong.

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In short:
“Big 1” allows you to hold client funds and offers greater flexibility but requires higher capital and stricter supervision; “Small 1” is a lighter model focused on referral commission, but new licences are very rare nowadays. Within “Big 1,” you may choose to have or not have Trading Rights, depending on whether you want a direct connection to the Hong Kong Exchange. Consider your business strategy, financial strength, and client needs before deciding. Good luck with your plans and future business growth!

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