Fees slashed as volume plunges

PUBLISHED : Monday, 31 October, 2011, 12:00am
UPDATED : Monday, 31 October, 2011, 12:00am

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Commission price wars are heating up on the Hong Kong stock market as brokers resort to cutting fees to try to boost their trading volumes.

The financial crisis and accompanying market volatility have taken a heavy toll on stock trading volumes - on which brokers earn their commission incomes. The latest data from the exchange shows that turnover of Hong Kong stocks plummeted 21 per cent in September from August.

Responding to the drop in trading, three brokerage firms said last week they would cut commission to a fixed charge of HK$5 or less for a single transaction over the internet on stocks and listed derivatives, with no minimum trading amount required.

'We have always been aggressive.' said Bright Smart Securities chief executive Nelson Chan Kai-fung, after his firm cut its commission to HK$4.88 per transaction on listed derivatives traded over the web.

A derivative marketer at an international bank estimated that more than 80 per cent of trades on callable bull and bear contracts (CBBCs) - a type of leveraged derivative - are closed by the end of the trading session every day, with just 20 per cent of the contracts held overnight.

Alex Wong, a director of asset management at Ample Finance Group, likened the trading of CBBCs to playing mahjong and betting on horses. 'Right now, people will sit on trades for only a few hours. They won't look beyond the next six months,' he said.

Stock exchange data shows that trade in CBBCs was up 14 per cent in September from August.

CBBCs are geared derivatives linked to a single stock or index that enable the buyer to speculate whether the underlying stock or index will go up or down to a level preset by the seller. Buyers need to pay only a fraction of the value of the underlying.

The contract can be 'called' (terminated) if the price of the underlying stock or index goes above or below a certain call price. In contracts on the Hang Seng Index, the range in which the index can fluctuate, outside which the CBBC will be called, has narrowed to just 200 points in recent weeks, which means the risk of losing most or all of one's money on a bet has risen significantly.

Chan shrugged off criticism, including that from fellow brokers, that offering discounts on margin financing and cutting fees on leveraged derivatives would encourage small and inexperienced investors to gamble on the stock market.

'If you are not interested in these products in the first place, I doubt these offers would tempt you,' he said.

But other brokers disagreed.

'We won't be cutting commissions,' said Alvin Cheung, an associate director at Prudential Brokerage. 'I think our clients want advice on these products.'

Although investor confidence was given a boost by last week's agreement among European politicians to expand the bailout fund, Chan said the fee reductions were here to stay.

Competition among local brokers has intensified over the past few years as the popularity of internet trading and dealing through banks has increased. Consolidation in the industry, which still has more than 400 broking firms operating in the market, has been happening for some time, according to Chan.

The latest commission price war was just another of the challenges facing the industry and one that had to be embraced.

'You need to ask yourself - when was the last time you spent money to improve your services to clients?' Chan said.

'If you are just going to sit in the office and wait for clients to turn up, those days are over.'