HOW big is the soft dollar business in Hong Kong, and where is it going?IF compared to the United States or British markets, Hong Kong is still in the niche category. I would say less than 10 per cent of total volume is transacted on a soft dollar basis, whereas in the US it is at least 40 per cent. The fact that there are only three ''specialist'' soft dollar brokerages in Hong Kong gives an indication as to its size. The industry has, however, grown rapidly over the past few years and I suspect that growth will continue until we start reaching levels that are consistent with other mature markets. Have you any comments about the Securities and Futures Commission (SFC) consultation paper on cash rebates and soft commissions? We largely support the proposals dealing with soft commissions in the discussion paper. The SFC really is not proposing anything more stringent than those regulations which are already in place in the US and Britain - markets, where Hoenig and the industry has thrived for many years. If adopted in Hong Kong, these regulations will level the playing field for market participants, which is good, and further legitimise a practice which is already widely accepted around the globe. The added transparency brought on by disclosure requirements should allay any leftover concerns investors may have. Many people appear to think cash rebates and soft commission are one and the same thing. Is this true and, if not, what is the difference between them? The main difference is that soft commission credits are discriminating, while cash rebates are not. Soft commissions are used to pay only for those services which, in the SIB's [Securities and Investment Board, the top British regulator] words, ''can reasonably be expected to assist in the provision of investment services to the firm's customers and which are in fact used for the benefit of those customers''. The investment managers' needs extend beyond those that can be provided by a full-service broker. Third party research services, such as economic-political analysis reports, portfolio modelling systems, third-party advisory services, and fundamental database services are all vital in the investment decision-making process. The payments for these services are made to the service providers, not the fund managers themselves. Fund managers can also use soft commission credits [and many do] to offset safe custody and trustee fees: fees which would normally be paid out of the funds themselves. This directly benefits the investor by reducing charges to the fund. When a fund manager pays commission to buy, say, stock in Hong Kong, he is getting essentially two things in return: execution and research. What soft commission brokers are doing is de-coupling the research portion of the commission and substituting it with an independent source. The fund manager pays the same amount of commission to a soft commission broker that he does to a full-service broker. The soft commission broker can afford to offer this research portion because it doesn't incur the costs associated with producing in-house research. The genesis of soft commissions came with this de-coupling of commission rates in the US in the 1970s. A criticism made of soft commission is that it encourages fund managers to churn their accounts, irrespective of market conditions, to meet soft dollar credits? I suppose the same could be said for retail brokers with discretionary accounts. It is up to the manager to live up to his fiduciary responsibilities and I haven't seen anyone who hasn't, nor, for that matter, have the Securities and Investment Board in Britain and the SEC [Securities and Exchange Commission] in the US, which have studied this issue at length. The quality of execution is another focus of criticism. How can you ensure best execution can be maintained? Do you have any evidence to show best execution is not affected by soft commission-linked transactions? If anything, it is better. Since we are acting on an agency basis and not as principals [trading off our own book], we act in the best interests of the customer and that usually results in good execution. I have been told on more than one occasion from clients that our executions are generally better than those of integrated houses. Ask around. I should note that over 30 per cent of Hoenig's business is derived from execution only or straight discount commission trades in which no soft element is included. If we weren't doing a good job our clients would simply go elsewhere.