Many Hong Kong brokers are salivating at the prospect of a surge in online investing following the launch of the stock exchange's new trading system. There is irony in their enthusiasm. Technology is a double-edged sword for the stockbroking industry, with the potential not only to cut costs and increase efficiency, but also to render brokers' traditional services obsolete. It is a factor that has been generally overlooked in the rush to grab a piece of what - if overseas experience is a guide - will be a huge growth area. The third generation of the stock exchange's Automatic Order Matching and Execution System (AMS/3), launched yesterday, will allow investors to place orders directly into the system using personal computers or mobile phones. They will do so through gateway systems provided by brokers, but in practical terms there is no reason why they should not connect directly to the exchange. Legislator Sin Chung-kai said Hong Kong Exchanges and Clearing (HKex) should open its system to individual traders. Mr Sin, chairman of the Legislative Council's information technology panel, said keeping brokers in the Internet-trading loop was 'a political decision rather than a technical issue'. The SAR's broking industry is no stranger to cartel-like behaviour: witness the horse-trading last year over the Government's proposed market reforms, which led to the creation of HKEx. Given the history, it is hardly surprising that HKEx, which remains majority-owned by broking interests, is not volunteering to cut brokers out of the business. In this it is no different to overseas exchanges. Yet Mr Sin's call is a reminder of the possibilities opened by technological progress, which subverts established business channels and which may raise questions over the long-term shape of the broking industry. AMS/3 marks a milestone for the exchange, bringing it to the technological level of other overseas developed markets. The exchange's previous trading system, AMS/2, was a closed, proprietary system. If a brokerage customer placed a buy or sell order by telephone or in person, the broker had physically to input the order on an AMS/2 terminal. The small number of 'online trading' services already offered in Hong Kong are in reality misnomers, since an order placed over the Internet has to be received by a broker and then re-entered on an AMS/2 terminal. By contrast, AMS/3 is Internet-compatible, allowing brokers - and, theoretically, individual investors - to connect their own systems directly to the exchange. Despite yesterday's launch, Internet-based trading will not be fully enabled for several months. AMS/3 is being introduced in three phases: in the first, the AMS/2 terminals are simply replaced by a faster system. In three weeks, about 40 selected brokers will be allowed to connect their own trading platforms to the system, allowing limited online trading. The new system will be fully rolled out in January, opening access to the rest of the SAR's 500-odd brokers. About 200 have announced plans to launch online services. Direct investor access to AMS/3 is not simply a matter of trade execution. When Hong Kong investors trade online, brokerages' internal computer systems will automatically check whether they have the money or shares to settle their deals. 'The whole process will be done automatically within a few seconds: investors will not even be aware that their orders have passed through the gateway of their brokers,' HKEx deputy chief operation officer Lawrence Fok Kwong-man said. However, these functions could be equally well performed by HKEx, Mr Sin argued. 'Some investors would prefer to deal with the exchange directly rather than brokers. I think the Government should consider this possibility,' he said. Legislator Henry Wu King-cheong, who represents the brokers in Legco, was predictably cool towards Mr Sin's proposal. 'Some retail investors like to trade with brokers rather than computers. Some of them do not know how to use the Internet, while some prefer to talk to traders rather than trading through a machine,' Mr Wu said. 'Internet trading will not replace the role of brokers.' Mr Wu also said brokers reduced market risks as they knew the background of clients and could effectively monitor their financial positions. Brokers also acted as lenders to enable customers to trade on margin, a function that the exchange could not fulfil, he said. Given that individuals can hold their shares in the Central Clearing and Settlement System (CCASS), it appears unclear why trading directly with the exchange should mean higher risks. A bank account and CCASS account linked to the exchange would be sufficient to monitor risks, Mr Sin said. 'Of course some old-style investors would like to stick to the old way of trading through a broker but a new generation of investors will want to trade using a new method, without a broker,' he said. The high-profile collapse of several brokerage houses during the financial crisis in 1998 had damaged investor confidence and might encourage direct trading with the exchange, he said. 'It is just like booking air tickets. People can buy tickets through agents but they can also be bought directly from the airline companies. The securities industry may adopt the same method,' Mr Sin said. However, the prospect of strong opposition from brokers meant the Government was unlikely to promote a brokerless market, he conceded. Whether brokerless trading becomes a reality or not, the future for brokers is likely to lie in value-added services such as research and advice. As online trading grows and with the scheduled abolition of minimum commissions in 2002, pure execution services are likely to become ever lower margin. Hong Kong Stockbrokers Association chairman Paul Fan Chor-ho said investors would need brokerage houses even after AMS/3, as brokers could advise clients on how to invest. Mr Fan also said there would be a conflict of interest for the exchange in dealing directly with clients, as it would be competing for business with brokers. It will also be difficult for the exchange to manage so many clients' accounts.