The Stock Exchange of Hong Kong has issued a warning to investors who use non-exchange participants in the first sign of official concern over a brewing price war among on-line brokers. In an announcement yesterday, the exchange said the protection of its compensation fund applied only to clients of exchange participants. It said it was responding to 'inquiries from members of the public about investor protection' and did not mention on-line brokers by name. However, its statement came only days after two Internet brokerages offered zero-commission schemes to attract new clients last week. The stock exchange, a subsidiary of Hong Kong Exchanges and Clearing, said it 'wishes to clarify that the protection of the Unified Exchange Compensation Scheme is only afforded to the clients of exchange participants'. Clients of brokers that default can claim compensation from the fund up to a maximum of HK$8 million per brokerage. The exchange reminded investors 'to ensure that they have signed a client's agreement with their exchange participants'. Investors should also 'have kept all evidence relating to their dealings in securities, in particular the relevant contract notes', it said. The notice came after Taiwan-based KGI Asia and local Internet brokerage Boom Securities launched promotional schemes waiving commission charges for new registered clients last week. Last Monday, KGI Asia said clients registering between then and June 30 could trade stocks without any commission or handling charges until the end of the year. On Saturday, Boom Securities offered a waiver of commission charges to those who registered as new clients at a promotional event that day. Many brokerages said they were considering following the same tactic to boost business as no objection had been raised from either the stock exchange or the Securities and Futures Commission. On-line broking is expected to take off following the introduction of the stock exchange's new AMS/3 trading system - which will allow investors to place orders directly through the Internet - and on-line brokers are in a race to build market share. However, doubts have been raised over whether investors have received sufficient warning of the potential risks involved in such promotions. According to an account-opening form downloaded from KGI's Web site, clients register with KGI Asia rather than its subsidiary KGI Securities Hong Kong, which is an exchange participant. Boom Securities is not an exchange participate and routes its clients' orders to other agent brokers to execute. Under stock exchange trading rules, broker participants must levy a fixed 0.25 per cent minimum commission. The minimum commission rule is due to be abolished on April 1, 2002. However, analysts said firms might be able to circumvent the rule by using a non-exchange party as an intermediary, which would cover the commissions a client should have paid. Clients would not be covered by the exchange compensation fund if they only registered and traded with such parties but not directly with exchange participants, the analysts said. KGI Asia associate director Ben Kwong Man-bun said he did not believe the announcement was directed at the firm. 'It is normal for a regulator to remind investors to be aware of any potential risk,' he said.