LONG regarded as the outsiders of the stock markets, the soft commission brokers now believe their time has truly arrived - in Hong Kong and the rest of Asia, and in the United States and Europe. The amount of stock traded by these specialist houses now accounts for a significant proportion of all deals in the US, and their penetration is growing deeper in Europe. But this has not stopped the whisperings and suspicions of their mainstream rivals, many of which have also dabbled with the system. The expansion of pure soft commission brokers in Hong Kong is being viewed with a mixture of mild alarm and cynicism by regular full-service brokers - alarm because any competition has got to be bad news in the current flat trading conditions; cynicism because they question the ability of their rivals to deliver the advertised advantages to fund managers and clients. There has to be a touch of hypocrisy to the criticism. Few full-service brokers can deny that they offer some sort of soft commission service, often at the request of their clients. The problem, according to the soft commission players, is that no one really understands them and, as always, it is the unknown that produces the deepest fears. At its simplest, the charging of soft commissions is an agreement between a fund manager and a stockbroker to do a certain amount of business together. In return for this guaranteed business, the broker agrees to defray the fund manager's costs by supplying specialist services which are supposed to assist the fund manager. A fund manager agreeing to do a minimum amount of business through one of these houses will be rewarded with a kaleidoscope of services. News screens, databases, specialised research materials, magazine subscriptions . . . the manager names it - and if it is within the acknowledged list of products, the broker will provide it. In the early days of soft commissions the range was even wider - hotels, flights, even companions were rumoured to have been on the menu. This, it can be argued, is rebate by another name, and in Hong Kong, where commissions are not yet up for negotiation, rebates are a touchy subject. One of the major differences between soft commissions and traditional rebates available in the territory is that the buyer in the street never gets a chance to enjoy soft commissions. Those who say individual players similarly do not enjoy rebates ought to change their brokers, according to some insiders. If the deal is big enough, or the incidence of dealing frequent enough, arrangements can be made. But straight rebates are a hot topic in Hong Kong, and are being addressed by the Securities and Futures Commission, while soft commissions are a much wider and richer field of controversy. Some say that soft commission brokers are among the strongest supporters of the abolition of the rebate system, thereby leaving them with a de facto advantage in commission structure. In Hong Kong, the game is basically in the hands of three specialists: Thamesway, Hoenig and Tiedemann Securities. The territory has yet to address the soft commission question and come to a ruling on what may or may not be offered by brokers, but the whole subject has been attracting the attention of overseas regulators. Both New York's Securities and Exchange Commission (SEC) and Britain's Securities and Investment Board (SIB) have looked into soft commissions to see if they ought to ban the practice, or in some way control it. In 1986, when the argument revolved around what could be construed as ''research'', the SEC ruled that this was anything that gave assistance to money managers' decision-making. This was a landmark decision, which opened up the soft commission business in the US. It is estimated that about 35 per cent of all commissions paid to brokerages in America now go to soft commission houses, or those no-frills houses which do nothing but buy and sell stock, offering no research or other back-up. The amount of soft commission, or ''soft dollar'' as it is also known, amounted to about US$1 billion in 1992. Soft commission brokers were subjected to an inquisition in Britain in 1990. Following complaints from broker SG Warburg to the SIB about the breadth of services being offered by rivals, a review of practices was launched. A tightening of the rules followed, but soft commissions were deemed to be permissible. War ensued, with big houses offering very low commission rates and within months, accusations that brokers were virtually buying business brought the SIB back in as referee. Despite claims that some firms had not been offering clients the best prices for their buy or sell trades in order to recoup the costs of providing soft commission services, the SIB stepped back, contenting itself with spelling out the duty of fund managers to ensure their deals were being executed fairly. Now more than 15 per cent of all deals done on the London Stock Exchange are through soft commission brokers, and more than half of all institutions have used their services. However, reports suggest the pickings have not been easy, and some soft commission houses are specialising in trading overseas stocks or the fixed-income and derivatives markets. All the questions which have been asked in the US and the UK will now have to be addressed by the authorities in Hong Kong, who will have to satisfy themselves that this form of trade is appropriate for its institutions. The expected growth of local institutional investment from the growth of pension funds in the territory will also put the subject in the spotlight. When soft commission is addressed, the key question will inevitably be: ''Who gains; who loses?'' The debate has always revolved around who really benefits from the savings in costs which soft commission offers to fund managers. Is it the managers, or is it their clients: pension funds, unit trust investors, insurance companies? Critics have traditionally claimed that the benefits go straight into fund managers' profits, rather than investors. The quality of execution of share trades is another frequent concern, and there are fears that to maximise their soft commission benefits, investment managers will ''churn'' their portfolios, that is, turn them over more frequently than is necessary. All these potential abuses have been examined by the regulatory authorities in the US and Britain, and rules to prevent them have been put in place. Until Hong Kong's authorities choose to investigate soft commissions and produce their own guidelines, brokers say they will use the rules that relate to the home of the ultimate client. Bradley Hunt of Hoenig said: ''If business is ultimately done for a client in the US, we will make sure we follow SEC guidelines. In the UK, we follow the rules of the Investment Management Regulatory Organisation.'' Peter Randall, director of Thamesway, feels the real key to the criticisms is disclosure. ''If you disclose exactly what you are doing to everyone you are doing it with, it can't be a problem. If you tell the ultimate customer what you are doing, and send a detailed statement every month, and approval is given, then I think that has to be all right,'' he said. Together with rival Hoenig, he claims that the real advantage of dealing through a soft commission broker is that it is a no-frills service, with better-than-averageexecution. The benefits that come with it are only part of the attraction, and according to Mr Randall, the spread of the finely defined services offered by Thamesway is just beginning. ''Soft dollars is not the whole story. It is part of trend we see developing worldwide. Increasingly, managers are looking to pay for execution services separately from research services and separately from capital committing services,'' he said. ''What we did two years ago was an analysis of what we thought stockbroking was going to look like in 2010, and we came to the following conclusion: ''There will be the big capital groups like those in the US with a lock on their own markets. Group two will be the research boutiques, high-quality data providers. ''The other houses that survive will be execution-only specialists. Execution-only becomes a commodity, and commodities price off the costs off the lowest-cost producer. ''In order to be a commodity producer you have to offer good service, excellent support and no frills - low price, highly professional, and highly flexible.'' Ambitious indeed. And Mr Randall claims that business has been booming, and expansion of Thamesway's Exchange Square offices has been planned. Formerly part of the UK Barclays de Zoete Wedd broking and investment banking house, Thamesway was last year taken over by the Reuters financial information giant, which also owns the Instinet automated trading network for professional investors. With such powerful backing for its Asian operations, and with US-based Hoenig, regarded as one of the key architects of the business, also established in the territory, the growth of soft commission broking in the region will mean some hard battling for market share. A careful watch on the products offered and levels of discount provided will be required if we are to avoid going through all the old regulatory arguments again. And in Asia, as in the rest of the world, the real test will be whether the benefits show through in the returns of the funds managed by regular users of soft commissions.