Let natural selection work on stockbroker extinction
A statutory stockbrokers' association is needed to set rules to stop cut-throat competition as a commissions war threatens to push fees too low for small players to survive, lawmakers have urged the government.
South China Morning Post, November 15
Our government made one big mistake back in 1986 when it combined the four existing stock exchanges into a single branch of the civil service. Someone decided to grandfather all the existing stockbrokers.
This amounted to 839 of them at the time and they all got seats on the new stock exchange.
You have the obvious question. How could there have been enough business for them all? Back in 1986 turnover averaged less than HK$500 million a day, and even if they all charged 0.5 per cent commission, which they couldn't, they would have had average revenues of less than HK$6,000 a day to pay off all costs.
That would be the average, but the big brokers would have taken almost all of it. Two-thirds of the rest wouldn't have made enough money to pay for yum cha. How could they live?
We might be tempted here to make allusions to other … ahem … professionals who have no visible means of support. We might talk, for instance, of front-running and of false pricing, of surreptitious mobile-phone calls on the Exchange Square walkway just before the market opens, and of dealers who wear keys to the time-stamping machine around their necks and decide only after the market closes what stock will go to what client and at what price. But we shall refrain.
The point is that natural selection did indeed operate and, 20 years later, the number of so-called market participants had declined to 470. This is still a good many more than the market needs, however, and their number has gradually increased again over the past eight years while commission rates have steadily tumbled. According to legislator Christopher Cheung Wah-fung, these have now gone as low as 0.03 per cent.
So they are still in a fix, and Cheung has recommended the age-old way of solving this problem. Let's rig the market, he says. Let's have mandatory minimum commissions, at least for small brokers. He doesn't care about big brokers. They are not his constituents.
He doesn't quite put it in these words. I think he is embarrassed to say exactly what he means. I have had to do it for him.
And it's as bad an idea as it always was. In the first place, what is hitting small stockbrokers is not just low commissions but the fact that big fund managers have fled to so-called dark pools where they can deal out of sight from small brokers who front-run their trades when these are conducted in open view on the stock exchange.
This may affect the direct trading profits of small brokers but makes no difference to their commission income. Big fund managers do not deal with them anyway.
But more than that, these small brokers are still living in a world where they stand, chalk in one hand, the other hand cupped to an ear, waiting for shouted instructions from a phone clerk to mark a new bid/offer on the board.
Technology has passed them by. A single website can now do what it once took 839 brokers to do. The only thing these people have going for them now is their own functional constituency seat in the Legislative Council. Stockbroking as a separate, specific trade is headed down the same path as the woolly mammoth and the dodo bird.
Let it slide down that path to extinction in peace. Rigging commission rates will do us no service.