Jake's View

Forget 'buy' or 'sell', tip for small brokers is 'get out'

A handful of brokerages could serve retail clients, and maybe we don't need an exchange

PUBLISHED : Thursday, 25 July, 2013, 12:00am
UPDATED : Thursday, 25 July, 2013, 3:57am

One in four home-grown brokerages may close as trading fees plunge and competition from banks intensifies, according to an industry group.

Bloomberg, SCMP
July 23

Bye-bye Tyrannosaurus Rex, bye-bye sabre-toothed tiger, bye-bye Hong Kong broker bird. Evolution has done them all in and, save for the last, they have all recognised it and vanished.

Let me tell you the story of why we still have something like 550 so-called "market participants" clogging up the wheels of securities trading on our stock exchange.

It happened because we once had four stock exchanges rather than just one. When they were unified by government edict in 1986, all of their members had to be offered seats on the new unified exchange, even those of the tiny Kowloon exchange, which was started on the it's-not-fair plea that Hong Kong Island had three exchanges and Kowloon none. Kowloon, however, was not properly wired up and thus the Kowloon Exchange operated from - you guessed it - Hong Kong Island.

I digress. The terms of the seat transfer were advantageous and most holders jumped at the offer. There were just short of 900 of them at the start. I was actually one of them as seat holder for Sassoon Securities.

Business was good, too. Turnover on the exchange was only the tiniest fraction of what it is now but foreign institutional investors were coming into the market. Opportunities were thus magnificent for front-running, unfortunate pricing and generally taking advantage of one's position on the knowledge curve, so to speak.

That's not entirely fair, I grant you, and it wasn't me. A good deal of honest business was still done on the exchange by these small seat holders. On some days when the market just drifted along it may even have been the majority of their business.

You can't fool all fund managers all of the time, however. Increasingly, they abandoned the official exchange for their own off-market trading arrangements, the so-called "dark pools".

Dark pool trades are still put through the official exchange at the end of the day. This is required for ownership registration. But you can no longer cup your ear for news of them coming and then run to get there first. By the time you hear of these big deals they are already done.

Mandatory minimum brokerage commissions have also been abolished, leaving law as the last bastion of 17th century-style price rigging, and clients increasingly scorn brokerage research - you can't fool all of the people all of the time. Yes, it is an increasingly difficult world for small brokers and I have the solution for them. Go out of business, fellas, and take up another way of making your living. Your day is past. Our exchange does not need 550 of you. Perhaps 55 would do for dealings with the general public.

In fact, I wonder if in a few years' time we will even need a formal stock exchange. All we really need is a website backed up by a legal registration service with only trusted securities allowed for listing, the kind that don't have their fangs permanently out and showing. Ever fewer of our exchange's listings pass that test these days.

On the other side all we need of intermediaries is that they meet the capital requirements and can prove that their back offices properly separate client and house accounts. Most big fund managers meet these requirements and can easily trade directly. They already have fully capable dealing desks.

The retail clients will still have to use intermediaries, of course, but they can use their intermediaries' websites as a pass-through from the exchange's, which many already do. Did I say we might still need 55 brokers for the general public? Try five or six.

And think of the wonders this would do for bringing down the costs of trading. It's a big concern for major investors and could become the key to where they go as securities are increasingly listed in multiple official locations.

Ah, but I forget. Since 1986 our exchange has been an arm of the Hong Kong government and nothing that government does is ever changed or brought to an end. Goodness me, we still even have a Trade Development Council. That proves it. Sorry for wasting your time.