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Sara French

IF Hong Kong's on-line stock brokers are to defend their cyberturf from big United States-based players, they must offer local investors a global range of financial products and interest international customers in local offerings, according to the SAR's leading on-line broker.

 'How do you keep your clients?' Mark Duff, the managing director of Boom Securities (Hong Kong), asked members of the Securities Institute last week. 'By offering an enormous inventory to sell . . . You can't just be a Hong Kong inventory of stocks. You're not allowing your clients to hedge themselves. You're not allowing your clients' portfolios to grow.'  Boom [www.boom.com] made financial history just over a year ago when it inaugurated on-line trading of Hong Kong-listed equities.

 Since then, three other companies - Celestial Asia Securities Holdings [www.

cash.com.hk], Fortitude Securities (Hong Kong) [www.

mrmarket.com] and Mansion House Securities (through Fortitude) - have joined the fray.

 So far, however, only Fortitude offers on-line access to markets outside Hong Kong, serving as the trading engine for brokers in Latvia, Taiwan and the US. But Boom says it hopes to supplement its Hong Kong stock trading with access to markets in 10 countries.

 Mr Duff did not put a target date on those aspirations, but said he had been approached about joining broker networks on 12 occasions. He predicted globe-spanning market access via the Internet would become reality in less than two years.

 'It's less than 24 months away before someone comes out and says, 'Hey, we're the first to trade 35 global markets which account for 95 per cent of global turnover on a daily basis'. It's spreading like wildfire,' he said.

 Certainly, on-line trading is growing quickly. In the US, it reached an average of 340,000 trades per day in the final quarter of last year, up 34 per cent from the previous quarter, according to Credit Suisse First Boston technology analyst Bill Burnham.

 But Hong Kong's growth, though exponential, is on a much smaller scale. Between 10,000 and 15,000 of the SAR's retail investors were trading on-line - 80 per cent of them through Boom - at the end of last year, according to AMI Business Consulting, a division of Asia Market Intelligence. That is up from zero at the end of March last year, but it is still less than 2 per cent of the 841,000 retail equity investors the stock exchange claims for Hong Kong.

 Mr Duff knows only too well the limits of the SAR on-line stock market. Using a bullish estimate of one million for the number of Internet subscribers in Hong Kong - the Office of the Telecommunications Authority puts the figure at 623,000 - he pegged the on-line brokerage industry's potential client base at just 100,000.

 'Nevertheless, Hong Kong could actually do very well,' he said.

 Success hinged on attracting financial clients and financial products from all over the world, including information and initial public offerings. For example, Mr Duff said, 44 per cent of international trades on Hong Kong stocks were done in Britain and 25 per cent in the US. He described the Internet as a great solution for such overseas investors.

 Mr Duff is not alone in arguing that Hong Kong's on-line brokerages must diversify or die. Henry Birdseye Weil, a senior lecturer in management at the Massachusetts Institute of Technology, issued a stark warning last November in a study commissioned by the Stock Exchange of Hong Kong, the Securities & Futures Commission and the Better Hong Kong Foundation.

 'Hong Kong faces a very serious threat that its retail market will be 'cherry-picked' by foreign financial-services groups,' he wrote.

 Without pro-active initiatives to foster on-line trading - such as development of an Internet-compatible trading platform for on-line services, creation of internationally based derivatives tailored for Hong Kong investors and drafting of regulations that incorporate the on-line option - Hong Kong would be marginalised, Prof Weil said.

 The retail-investor base would shrink as traditional investors aged and younger, more-sophisticated ones defected to the foreign brokers' on-line services. This could set in motion a vicious cycle.

 'If nothing is done, erosion on the demand side will lead to reactions on the supply side, and vice versa. Red chips increasingly would list in London and the US. More and more fund managers would shift their base out of Hong Kong. As a result, Hong Kong would lose very substantial trading volume and asset balances to other financial centres [particularly ones specialising in on-line services],' he wrote.

 Fortunately, SAR authorities seem to be taking Prof Weil's warnings on board by introducing a series of reforms that appear to address many of his concerns.

 The stock exchange plans to introduce an Internet-compatible order-matching and execution system in mid-2000.

 The Government is refining the basic architecture of Hong Kong's markets by demutualising and merging the stock and futures exchanges and their associated clearing houses. It has begun a consultation process to rewrite local securities regulations to reflect on-line realities.

 By seizing the initiative, Prof Weil said, Hong Kong could see 20 per cent to 30 per cent of its retail investors shift on-line by 2010. Furthermore, because they would be among the most active of investors, their trades would represent 30 per cent to 40 per cent of retail volume.

Sara French 



On-line brokers told to adopt global view