Brokers’ rush into a crowded market may end in tears
Number of brokers and fund houses hit record in the city while turnover down
The opening of mainland China’s capital markets has drawn a record number of new brokerage firms and asset management companies to set up in Hong Kong, but analysts have mixed views on whether they have made the right move.
While some believe the opening of the Chinese market will bring in more cross-border trading and new business for local brokers and asset management firms, others say the market is so crowded that the new companies will find it hard to compete.
According to data from the Securities and Futures Commission, there were 1,153 asset management firms licensed by the commission as of the end of March, the highest number on record. The number is up 8 per cent from a year earlier.
In first quarter alone, there were 18 newcomers in the city.
The number of new licensed stock brokers is even greater, with 99 new companies joining the stock market in the city during the first quarter.
That brought the total to 604 — the highest in two decades.
It may be imperfect timing, though. The stock market’s turnover in the first quarter is 23 per cent down year-on-year.
Capital Link Investment Holdings chairman and chief executive Brett McGonegal said the new entrants may be looking for a path to the Chinese market but he warned their efforts may “end in tears”.
“The rush is to gain a foothold outside of mainland China. Financial services companies, primarily securities firms, are scrambling to add another dimension to what has been a one dimensional domestic offering,” McGonegal said.
“This trend isn’t trying to get ahead of a turnaround in volume and activity but rather more blindly just trying to grow and add product offerings in a foreign domain,” he said.
“I think this trend will end in tears as volumes and commissions are depressed and heading lower. The cost to build will not be recouped within the current trends,” McGonegal said.
Benny Mau, chairman of the Hong Kong Securities Association, said many cross-border trading schemes launched in recent years have drawn financial firms here.
Beijing allowed in November 2014 the stock exchanges in Hong Kong and Shanghai to unite for cross-border trade. Separately, the mutual recognition scheme that allows cross-border fund sales started in January.
“The stock connect scheme requires overseas investors to trade companies’ A-shares via a Hong Kong based broker, while the mutual recognition scheme also requires only Hong Kong based funds to be qualified to sell in China. This has led more international firms to set up here. This trend will continue with China’s opening up and the coming Stock Connect between Hong Kong and Shenzhen,” Mau said.
Mau said many new brokers and fund houses in Hong Kong came from mainland because Hong Kong has a lower entry threshold than the mainland while the approval process is much easier.
“The mainland companies or individuals who were interested in conducting securities businesses found it very difficult to get a licence in China. They would cross the border to apply to the SFC to get a brokers’ licence in Hong Kong instead,” he said.
Jasper Lo, chief executive of King International, is among the newcomers. The company now offers foreign exchange and gold trading and has applied for licences from the SFC to trade stocks and futures.
“We plan to do a number of business lines including stocks, futures, foreign currencies and precious metal trading. It is true that the current stock market turnover is low, but then we can have income from forex and gold trading which is pretty stable. The futures markets are also doing strongly. Diversification is the key of success,” he said.
As a small player with only about 30 staff, Lo said cost control and technology is important.
He set up the office in the ICC in Kowloon to escape the high rents in the Central district on Hong Kong island.
“By using the latest technology, we can offer an easy and convenient trading platform and information via computers and mobile phones for investors. We can skip a lot of manual administration work and keep costs down while investors can still enjoy good services,” he said.
Lo said Hong Kong investors do not mind trading with small brokers.
“Being small is not a problem as long as you can provide a good service for investors. Many customers would prefer to trade with small brokers as we can provide a personal service. Many of our customers and our staff have become long-term friends already. They would not switch to other brokers just because they are bigger,” Lo said.