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Jake's View
PUBLISHED : Thursday, 25 July, 2013, 12:00am
UPDATED : Thursday, 25 July, 2013, 3:57am

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

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.



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This article is now closed to comments

In fact, I wonder if in a few years' time, the SCMP will still play host to Mr van der Kamp's increasingly radical libertarian fantasies, which not only have lost connection with the reality of Hong Kong and Hongkongers' lives, but also more and more suffer from a narrow self-interested ideological tunnel vision that makes the Cross-Harbour Tunnel seem like the open prairie.

Or if they will be relegated to a fringe blog called 'Business Good, Markets Best, Government Bad, Taxes Worst' on an anarchist website, where they belong.
Long live Jake. Every news organisation needs a curmudgeon.
Hk trading is backward, outdated and expensive. Most of the trader platforms online are real bad, primitive like a prototype. You can trade worldwide stocks including HK, commodities, futures and bonds via US platform with much lower cost and better technology in trading and reporting. Hk small brokers will be eventually eliminated as people are trading more online. I trade on the beach online on everything worldwide including Hk even I'm not in Hk. Technology changing rapidly but not Hk brokers....
A major improvement to the HK market is to open up the HKFE HSI index option market to retail investors. Currently, retail investors have no choice but to trade warrants or CBBC on HSI index. There are three reasons for opening up the HKFE HSI index option market. First, warrants and CBBC are not standardized and are therefore more difficult to understand, greatly increasing the risk of unfair returns for the issuers. The variations also lead to a dilution of the turnover and thus reduces market liquidity. Second, warrants and CBBC cannot be written by retail investors, meaning retail investors can never earn premium from declining time value. This skews the risk reward in favor of the issuers. Third, combining the turnover of the two markets increases liquidity in the market, narrows the bid/ask spread, and leads to greater investor benefit.
The daily turnover for warrants based on the HSI index averages HKD 2500 million daily. In contrast, the daily turnover for HSI index options on HKFE average approximately HKD 350 million. A combined market would have a daily total turnover of approximately HKD 2850 million among a limited number of standardized, easy to price instruments, with lower bid/ask spreads. This will greatly benefit retail investors.
50% of HK is backward, obsolete, uncompetitive, and expensive. HK is living off the innovations and hardwork of the 80s. Another most serious problem is a lack of knowledge standards. For some reason, I don't have much faith in those "professionals" at those brokerages.
You want to kick every small brokerage into touch so the fat cats kill the competition and have afree hand to monopolise or cartelise the market so no-one new ever gets a look in.
When that happens the cost of trading won't go down for the small investors. Big investors will get preferential treatment while the small ones not in the insider knowledge loop will get screwed.
Well they might go on streets and strike like the property agents.
Then they motto will be : "damn you, save our jobs, please"


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