HONG KONG broking is facing its worst crisis in four years. Rapid expansion of the industry in the boom time of 1992 and 1993 has created huge operational costs unsustainable in the current market downturn, with share trading at the Hong Kong stock exchange averaging $3 billion a day. In many cases merchant banks and broking houses have stopped recruiting Hong Kong equity linked staff. Many dealers argue the critical time will come in the second half of the year. ''There is going to be a lot of soul searching among broking houses come June 30,'' said a leading broker. ''Many hope there will be an up-tick in business. If there isn't, the shedding of staff will have to begin by the start of the fourth quarter.'' Brokers are not the best managers of contraction. It tends to be handled in a bloody manner with mass firings to reduce overheads and acrimonious fights over senior executive severance terms. The last time there was a contraction firms - which previously claimed a long-term commitment to the territory such as Morgan Stanley, Bankers Trust and County NatWest - axed local broking offices in 1990 and 1991. If the low turnover continues some analysts fear a repeat of the bad old days. But, it is argued, the contraction - if it comes - might be different this time, with selective cutbacks, leaving a strong commitment to getting primary business in China, India and the rest of the region. But the huge research staffs and massive securities trading commitments might have to go. Baring Securities dealer James Slade said: ''So far no one is laying off, it's too early, but recruitment has slowed down. When it does happen salesman will be the first to go.'' Kleinwort Benson managing director Nick Allan said: ''Clearly this year, given the correction in world markets, there will be a slowdown in revenues from the primary side and secondary markets. ''Those who have expanded too rapidly, people who have built up a high level of overheads are more vulnerable. ''Across the board the numbers suggest that people are not making money. We are not having as good a time as we were a few months ago.'' So far 1994 has seen some of the worst returns on a first quarter in more than a decade. Not since the confidence-shattering days of the Sino-British treaty talks between 1982 to 1984 has the stock market seen such losses. On the first quarter to the end of March this year the Hang Seng index has plunged 24 per cent. On the year to date the index has dropped around 30 per cent. Merrill Lynch head of research Adrian Faure said: ''There will be some marginal players who are losing money now and some of these guys may well close down. ''Big players pulling the plug is unlikely. I don't think you will see what we saw in previous cycles with US houses pulling back.'' Peregrine sales director Chris Malpass said: ''Brokerages go through cycles just like any other industry. ''Earnings generated last year should help sustain brokerages this year. ''I would be very surprised to see the US commitment made in 1993 disappear in 1994.'' He added that corporations in Asia needed a great deal of funding and governments continued to need money. ''We have seen a sharp slowdown in the expected flows because of the markets but I think this is a temporary situation,'' Mr Malpass said. Nevertheless it looks as if the Porsche Turbo Carrera purchases inspired in March and April on the back of fat bonuses paid for commissions stacked up in 1993 are not going to be repeated in the next bonus round in 1995. Payments of two-year salaries to securities and derivatives dealers were common this year, after heady trading days where daily turnover reached $15.2 billion a day. At the time the flood of foreign cash seemed unending in a liquidity explosion the likes of which had never been seen before. But the market correction in the first quarter had a sobering effect. It could not have come at a worse time for Hong Kong broking. Just when overheads in staff, equipment and rents are at their peak stock market turnover has dived to levels not seen since June 1991, in real terms. Many brokers - some are nomads, coming down from Tokyo where the bears have ruled equities for more than three years - are not just worried about whether their bonus will cover the cost of buying a Porsche Turbo Carrera, they are becoming concerned whether there will be any bonus and, if the turnover stays at current levels, whether they will be in a job. Inflation fears in the US, along with a rise in interest rates, have put a cork on positive sentiment and huge capital flows into Hong Kong. Worse still Hong Kong has not been the only market affected. The entire Asia-Pacific market was hit. The region's markets are the worst performing in the world this year to date. China securities are down 50 per cent, in Malaysia smaller company stocks are down 27 per cent and the blue chips are down 24 per cent. In Bangkok stocks are down 24 per cent and in Indonesia they are down 23 per cent. This has robbed Hong Kong brokers of regional support. Adding to the misery, rising interest rates have cut off a valuable source of business: raising money through convertible bonds for Asian companies on the international capital markets of Europe. The failed $1 billion privatisation of VSNL, a telecom provider in India, by Salomon Brothers has thrown the Asian securities industry into deep shock and disarray. India had been one of the few places money could be made in the region. The failure of VSNL cast a huge shadow of doubt over the industry. A broker said: ''In these market conditions deals are being postponed or pulled altogether. ''The brokerages have a very high cost base because of expatriate salaries and housing. ''Rents in Exchange Square have doubled in the last year - I wonder when the music is going to stop.'' In the last two years Hong Kong has seen some of the biggest direct investment in securities-linked financial services ever. This period might now be at an end, despite the claims by many groups that they are still expanding and recruiting. Two years of blossoming stock returns in 1992, up 42 per cent, and 1993, up 115 per cent, attracted broking houses to the territory like bees to honey. This period was characterised by expansion among those broking firms already here and re-entry by the large US investment banks, which had ditched or drastically cut their operations here in the last major downturn after the Tiananmen Square crackdown in June 1989. The leading brokerages already here were Baring Securities, Jardine Fleming, Peregrine, Credit Lyonnais, HG Asia, Morgan Grenfell and Barclays de Zoete Wedd. In the last two years these groups have expanded dramatically. Together they probably account for more than 40 per cent of daily turnover, even in the peak periods, and many still say they are making money. Lately candidates include the Swiss - SBCI and UBS - a number of British firms including County NatWest, and, by far the most significant, those from North America. With fat cheque books and an eye on even bigger commissions, they re-entered the Hong Kong equities business with a combined investment of more than $200 million, according to some estimates.