Overstretched brokers to protest at longer trading hours – again
It looks like a tempest in a rice bowl, but behind the vitriolic protests by the city’s small brokers over their shortened lunch break is a bigger fight for a way of life.
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Enoch Yiu
07 November 2011
It looks like a tempest in a rice bowl, but behind the vitriolic protests by the city’s small brokers over their shortened lunch break is a bigger fight for a way of life.
Thousands of staff of small brokers plan to protest today in front of the stock exchange trading hall at Exchange Square to prepare to hand in a 3,000-signature petition opposing extended trading hours set to begin in March.
The Hong Kong stock exchange this March had already extended trading hours by 60 minutes, opening the market 30 minutes earlier and cutting the lunch break from two to 1&-1/2 hours. Now the exchange wants to reduce the lunch break another 30 minutes, starting in March.
Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia has said these and other changes were needed to match international practices and bring trading hours in line with the mainland.
But the measure brought small brokers out in what many thought was a surprisingly vociferous protest. They marched in the streets, lobbied legislators, bought newspaper advertisements, massed in Exchange Square and sent Li 6,000 letters of protest over the lunch cutback and others parts of his reform plan.
During one protest in front of the exchange in July, more than 100 brokers shouted out Li’s name, altering the pronunciation slightly so that it turned into an unprintable profanity.
For small brokers, with limited staff and capital, the earlier start and shorter lunch break were not about lingering over a cup of tea. They were about added costs that they say could drive them out of business.
Many small brokerages operate with only a handful of staff, who during lunch, often meet with customers, catch up on work and even do radio or television commentaries. A shorter lunch period means they would have to hire more staff to conduct business during the lunch break, when customers often show up, or give up lunch altogether.
Brian Fung Wei-lung, chairman of the Hong Kong Securities Association, said the bourse had not addressed the practical difficulties that brokerages faced.
And the situation is likely to get worse.
Futures traders now need to join an auction to determine the afternoon opening price, which is held 30 minutes before the market reopens. If the HKEx cuts lunch to one hour in March, the futures brokers will only have 30 minutes for lunch, “effectively scrapping the lunch break for futures brokers”, Fung said.
HKEx also plans to add a 6 1/2-hour evening futures trading session from 4.45pm to 11.15pm to match international practices.
“The evening trading would mean all brokers have to spend thousands of dollars more every night. We have to hire extra staff for the late shift and need to pay more for the electricity bill for the extended office hours,” said Christopher Cheung Wah-fung, chairman of Christfund Securities. “But then there may be only a few trades in the evening.”
And there’s another expense, too.
Fung said evening trading would be a good move, but he opposed the possible new margin requirements. Under the proposal, the exchange would determine the brokers’ positions at the evening close at 11.15pm, but then require them to pay additional margin based on the price at 9.15am the next morning.
“This is a mismatch, because the position of the brokerage house at 11.15pm will be different from what it is at 9.15am,” Fung said. That’s because clients may have cut their position after the close, yet the broker would have to pay more margin than necessary at 9.15. He added that the exchange should allow brokers to update their position at 9.15am when calculating the margin.
Other costs are likely to mount too - money small brokers can ill afford.
The exchange is spending billions of dollars to establish a new data centre and upgrade its trading system. These will strengthen Hong Kong as an international financial centre, but may also mean brokers have to pay higher fees to the exchange.
Unlike other markets dominated by large brokerages, Hong Kong has many small firms. Of its 450 brokerage houses, 380 are small firms, mainly serving retail investors. And survival has proved difficult.
Today, the market share of small brokers has been whittled down to 9.55 per cent, a far cry from their heyday 11 years ago when it was 40 per cent. The city’s 14 largest brokers, including some banks’ securities arms, have 56.8 per cent of the market, while 51 medium-sized brokerages have 33.65 per cent.
The decline of small brokerages is partly because the minimum brokerage commission of 0.25 per cent of the value of trade was scrapped in 2003. Since then, large brokerages have lowered fees considerably. Some have commissions of 0.07 per cent, while others waive the commission for a month for new customers and others collect a monthly fee.
Without the large client base, small brokers charge 0.1 per cent to 0.25 per cent and are not able to offer incentives.
Internet and mobile phone trading has lured many investors to large brokers and banks. Small brokers tend to retain those who prefer personal contact, but they have a hard time attracting new clients.
Finally, increasingly popular derivative products - such as warrants and callable bull-bear contracts - have become the domain of large brokerage houses and banks, further eroding the business of small firms.
The evolution of the brokerage business has probably saved investors money, but it has come at a cost.
“Over the decades, brokers have served millions of retail investors who want a small bet in the market,” said Fung. “If small brokers are forced out, the small investors will suffer because they will have fewer choices.”
He added big investment banks were not interested in serving small retail investors, while commercial banks did not have the same level of personal services for clients.
David Tung, the oldest broker in the city, who has traded for clients for 60 years, said small brokers often regarded clients as personal friends.
“My clients go to my office,” Tung said. “We go out to lunch from time to time. We are not just brokers and customers, but they are all my friends ... The commercial banks offer the internet or uniform staff to serve clients, but they can never offer the same personal services that small brokers do.”
But younger customers may think differently, preferring to invest by the internet, in which case, the longer hours benefit them.
Polly Leung, a retail investor in her 20s, likes to use the internet trading services of banks.
“Hong Kong is an international financial centre so it should trade for a longer period of time,” Leung said. “I think investors care more about whether they can make money rather than how long they can trade shares. If the market keeps falling, the extension of trading hours would not encourage me to trade as I cannot make money in a falling market anyway.”