The 400-odd smallest brokers in the city need to look at mergers with other players to survive as a new report shows they are finding it difficult to turn a profit even when the times are good.
The latest report by the Securities and Futures Commission shows the total net profit of the 500-odd brokers in the city stood at HK$5.66 billion in the first half of this year, up 129 per cent from the second half of last year. The earnings spurt was mainly caused by a 36 per cent rise in market turnover.
But the smallest group of about 400 brokers - in the so-called category C - actually saw profits drop 30 per cent to a combined HK$522 million.
The 14 largest players, which constitute category A, on the other hand, saw profits jump 72 per cent to HK$2.39 billion.
But the biggest winners were the middle group of category B, the 51 mid-sized brokers, whose combined profits soared 738 per cent to HK$2.7 billion.
This establishes a clear pattern of failure by the small players to generate more business even in a good market.
The mid-sized and big brokers, many of which offered low commissions or sophisticated online trading platforms to compete for clients, showed they could expand with the market.
Many small brokers serve mainly retail investors and, in most cases, have a close relationship with them. A number of these accounts were opened in the early 1970s when several stock exchanges came into being, eventually to merge into Hong Kong Exchanges and Clearing later.
Forty years on, many of the founders of these brokerages as well as their clients are in their twilight years, retaining a modest transaction volume that allows for a modest profit for both sides. But these old brokerages fail to grow much beyond this faithful band of old clientele. Nor do they have the capital or the know-how for online trading or other new trading facilities for the younger crop of investors who prefer to operate out of their mobile phones or computers.
The 10th round of the Closer Economic Partnership Arrangement agreement signed last month allows Hong Kong brokerages to enter the mainland market, but again, the smallest players don't have the wherewithal to do so.
The only way out for these players is to merge to cut costs and gain access to more capital necessary for technology investment.
But then, many small brokers have been bosses of their own firms and are reluctant to land themselves in a situation where they don't call the shots anymore. It's time they accepted that the game has changed and they have to play by new rules to stay in the game.