Banks elbow brokers out of business
Small firms grieve loss of trading business to banks Small firms blame unfair competition but many experts think size is what matters, writes Enoch Yiu
Shark's fin with rice.
It sounds like a fancy lunch to most of us and like crime to environmentalists but people who worked as stockbrokers in small Hong Kong firms in the early 1970s still use the expression to call up memories of a vanished world of easy money.
'Before the 1973 crash, the market was strong and brokers earned a lot of money. Some really could afford to have shark's fin soup every day. It was a deluxe dish that cost as much as what a factory worker made in an entire month,' recalls Chu Chung-tin, who retired from the securities business in 2001. These days, if not exactly off the menu for small brokers, shark's fin is at least severely rationed.
The retail securities business in general may be enjoying a new golden age but the big beneficiaries are the banks which have added stocks to their ever-expanding wealth management repertoire. The past decade has taken a heavy toll on small firms; of the nearly 1,000 that existed in the 1970s, all but about 450 have departed the scene.
Not all made a gracious exit, either. In the past two months, two brokerages have collapsed in suspicious circumstances. Whole Win Securities went into liquidation in May after the Securities and Futures Commission discovered a $28 million hole in its accounts. And just this Tuesday the SFC slapped a trading ban on Tiffit Securities after some of its clients' shares went missing.
Chim Pui-chung, who represents brokers in the Legislative Council, said both cases highlighted the difficulties faced by small firms. 'It showed the government should do more to assist the small broker to survive,' he said.
But what, exactly? Small brokers are the corner shopkeepers of the financial services world while banks and international securities firms are the volume discounters, the big-box stores. There is not much the government of a small jurisdiction such as Hong Kong can do against such economic forces.
Though Hongkongers are known the world over for their willingness to take a punt, local Chinese involvement in the brokerage industry is a relatively recent phenomenon. The first stock market in Hong Kong opened in 1891 and for decades remained the preserve of British gentlemen. In the late 1960s, though, it became the fashion for wealthy locals to buy a seat on one of the four exchanges that then operated in the city.
'Those were golden days for brokers when banks did not do securities trading and overseas brokers had not yet arrived. Anybody looking for a windfall in the stock markets needed to trade through us,' said Syed Bokhary, an industry veteran who set up his firm in the early 70s.
This year's boom in market turnover may be helping small firms forget the threats to their existence. According to the SFC, net profit at all stockbrokers in the first quarter was $3.8 billion, up 40 per cent from the fourth quarter last year.
But other statistics show that the principal problem, declining market share, is not going away.
Local brokers' business has not kept pace with the market. According to Hong Kong Exchanges and Clearing, which runs the stock exchange, the 400 smallest brokers had about 13 per cent of trading this year, down from 40 per cent in 2000. Meanwhile, the share of the 14 largest brokers has risen to about 55 per cent share from 30 per cent in 2000.
Another stock exchange survey, conducted in December last year, found that 64 per cent of retail trading last year was done through banks. In 2000, banks and brokers had almost equal shares of the pie.
Mr Bokhary said banks began to usurp the small firms' role in retail trading after the 0.25 per cent minimum brokerage commission was abolished in 2003. The competition that ensued saw banks such as HSBC offering zero commission on some trades.
Banks are looking for the stable fee-based income which stock trading provides, said DBS Bank managing director and head of consumer banking Sunny Cheung Yiu-tong. And they are responding to customer demand.
'It's a worldwide trend. Customers not only want to deposit money in banks, they want their lenders to provide a full range of financial services to manage their wealth and investments,' he said.
But brokerage firms still have their fans. A man who identified himself only as Mr Tsang said he had traded with Christfund Securities for more than 10 years and had no intention to switch.
'I go to the Mongkok branch of Christfund Securities every day because it's close to home. I like the atmosphere in the broker's office. You can talk with the brokers and other investors about what stocks to buy. It's more fun, kind of a social gathering.
'I tried trading though a bank but I didn't like it,' Mr Tsang said. 'The staff had no time to talk. All they could do was execute trades. It lacks the personal touch that you get at the brokerage house.'
Bob Cheung, on the other hand, says he trades only through banks. He likes the convenience of their branch networks - and their good name is important, too.
'I think I'm too small for stockbrokers to bother with, so I trade through banks instead. There have been stories about brokers collapsing and it looked pretty scary. Banks seem more reliable to me.'
When one small firm gets into trouble, they are all tarred with the same brush.
Tony Espina, the chairman of the Hong Kong Stockbrokers Association, said this was fundamentally unfair, the result of the different ways in which banks and brokers are regulated. The brokers come under the supervision of the SFC, while the Hong Kong Monetary Authority (HKMA) oversees the activities of banks, their stock trading included.
Mr Espina considers the SFC a far more demanding taskmaster than the monetary authority. Brokerage firms' staff face scores of disciplinary actions every year, he said, yet so far in 2006 the authority had initiated only one stocks-related enforcement action, against Wing Lung Bank in April for alleged unlicensed futures dealing.
'The SFC should take over the regulation of the banks' securities business to ensure that the banks and brokers are competing on a level playing field,' he said.
Mr Espina said the authority's focus was on the financial stability of banks; the SFC, besides monitoring that aspect of the brokerage business, also kept close tabs on the conduct of brokerage staff.
An SFC spokesman said the Securities and Futures Ordinance, which confirms the HKMA as the frontline regulator of banks' securities business, had been in effect for only three years and it was too soon to think about changing it.
'The SFC agrees local brokers have made tremendous contributions to the development of Hong Kong's stock market and the SFC will continue to facilitate the healthy development of the market,' he added.
At the HKMA, which has had a specialised securities supervision team since April 2003, officials say they co-operate with the SFC and the arrangement works well.
'It is sensible for the HKMA to be the frontline supervisor of banks' securities business because it has detailed knowledge of banks and is responsible for consolidated supervision of the whole of their business. The ultimate authority for regulating the securities business, however, rests with the SFC,' a spokesman said.
Asked about the much higher number of enforcement actions initiated by the SFC, the HKMA spokesman said only that the comparison was 'not helpful'. The law 'does not give banks any unfair advantage'. He added that the specialised securities team had been allocated more resources this year.
Among analysts and participants in the financial services industry, no one appears to believe that unifying the regulatory functions would prevent the banks' running off with more securities trading business.
Stephen Cheung Yan-leung, chair professor of finance at the City University of Hong Kong, said small brokers would fare no better if their bank competitors came under SFC control. 'Banks have strong capital and they can easily adjust to being regulated by the SFC. The war between the banks and the brokers is just like the one between the supermarkets and the corner shops. We all know what the result will be,' Mr Cheung said.
Bernard Chan, who is president of Asia Financial Group and a member of Hong Kong's Executive Council, agreed that size, not regulation, was the problem that brokers had to address.
Early this year, his company sold its banking unit Asia Commercial Bank, along with its securities arm, to a Malaysian firm. He said the mere fact of being a bank had not made it easier to sell securities. 'Size does matter in determining which banks or brokers survive.
'If you are a big bank such as HSBC or Bank of China, with hundreds of branches and millions of depositors, you can easily sell securities and other investment products. However, Asia Commercial Bank, which has only 12 branches, doesn't help its securities arm, Asia Financial Securities, to compete,' he said.
Even mid-sized brokers, which have suffered less erosion of their business than the smaller players, recognise the need to become larger and more diversified. Sun Hung Kai Financial, the oldest and largest locally owned broker, last month spent $4.32 billion to buy lender UA Finance.
Said chief executive Joseph Tong Tang: 'We want to prove that we are not only a broker but that we can also do a wide range of financial services such as personal finance, share margin financing, asset management and online trading.'
But the number of local firms with enough financial might to follow Sun Hung Kai's example is small. In the opinion of most brokers, Tai Fook Group, Christfund Securities or KGI might be able to manage an acquisition, but not many others.
Some small firms are seen surviving because they belong to wealthy families with other business interests. Many of these brokerages exist principally to trade for the accounts of their owners and do not rely on commissions.
Mergers are often prescribed as the remedy for an overpopulated market but Mr Bokhary said it was unlikely to happen.
'In a Chinese society like Hong Kong, everybody wants to be boss,' he said. 'Many people would prefer running a small brokerage business to merging with others. Many of the older brokers just want to keep their firms going until they retire.'