What will it take to reform the territory's most profitable guild? The Stock Exchange of Hong Kong is a limited company owned by 563 members, a majority of whom oppose major reform. A legislated monopoly insulated from the worst ravages of competition through the fixed commission system, members are not surprisingly reluctant to change. Still, cartel busting and competition issues figure increasingly highly on the Government's agenda, explaining the offer to scrap stamp duty in return for flexible commissions. Now, the debate is stalled with brokers seemingly hardened against the proposal. Arguments have been framed in terms of narrow minded, money grubbing brokers fighting the forces of history sweeping away cosy closed shops, ruled by a self-regulation code. The time has come for the Government to swing a big stick, allowing control to be released from the narrow interest group politics of brokers, the modernisers argue. Their argument has the moral authority of consumer empowerment and wider economic efficiency as competition hots up from rival financial centres offering dual listings and parallel derivative trading. Increasingly, the exchange is the preserve of the entire community whose savings are invested and traded. Quite why the rest of us should subsidise a few hundred brokers is, admittedly, hard to see. Hold on cry the brokers, things aren't that bad. When Jardine companies de-listed in Hong Kong and moved to Singapore, the authorities were forced to offer special Hong Kong rates of commission to make them competitive with the territory. Exchange supporters argue that Hong Kong is cheaper than any other rival financial centre for 80 per cent of trades. In any case nobody is actually paying the full 0.25 per cent on large trades with the typical practice of deals being dog-legged through non-broker accounts allowing real commissions to be effectively contested. What is more, to link the removal of stamp duty with commissions is unfair, they say. The Government is using a negotiating stance that can be seen as logically incoherent. Commission represents income for services rendered, while stamp duty is a government tax. What would wage earners say if the Government offered reduced income tax if they reduced their wages, the retort runs. Hong Kong is such a liquid market, in part, because of the counterparty risk run by brokers. Most Asian markets operate on the basis of cash up front, while territory dealers carry a position for two days before settlement is made. The anomaly rests less with the fixed commission structure than the practice of charging stamp duty - bemused first-time investors from the United States have to be introduced to the idea of supposedly laissez faire Hong Kong charging a tax on stock transactions. The trouble with this argument is that it represents the views of exchange members, most of whom have nothing to gain from an expanded and more sophisticated Hong Kong capital market. Indeed, who in their right mind would vote themselves out of a guaranteed earner. If modernisation is needed the impetus must surely come from the Government. The only reason the exchange members have such power is the rule guaranteeing the exchange sole trading status in Hong Kong. So long as the debate is confined to the narrow politics of what is good and fair for stock brokers we will continue to move in circles. If Financial Services Secretary Rafael Hui is serious about reform he could do worse than properly solicit the users of the exchange. Brokers may run the joint - by dint of history - but it is the pension funds and large investors that account for most business. Hong Kong may offer good value for money, justifying a policy of change, but the argument needs to include the opinions of other stakeholders in the investing game. Chances are most would rather pay less, than more, commission.
