Asia Stock Markets

Brokerages Squeezed as Asia’s Stock Turnover Falls


Falling stock market turnover in Hong Kong and Singapore is increasing pressure on medium and small-sized brokerage firms, hurting their commissions and forcing some to cut jobs.

Traders sit at their desks at the Stock Exchange in Hong Kong.
Mike Clarke | AFP | Getty Images

Phillip Chan, Director at Hong Kong listed mid-sized equities firm Shenyin Wanguo Securities says declining trading volumes have had a direct impact on the firm’s business since March.

“We are mainly an equities house — cash equities. Therefore we see an impact when volumes go up or down,” Chan told CNBC. “We see impact straight away. We don’t have any other products, we don’t have any other derivatives, trading, etc.”

Shenyin Wanguo has laid-off employees in the beginning of the year and Chan says the firm is keeping a close watch on costs and hasn’t expanded operations in the past couple of years.

Investors in Hong Kong and Singapore have been reducing exposure to equities because of market volatility and worries about Europe’s debt crisis. Daily stock turnover in Hong Kong plunged by 21 percent in the first four months of the year, while blue-chip stocks in Singapore haven’t seen much activity with action going to penny stocks, according to traders.

Smaller brokerage firms that don’t offer a diversified portfolio of products are struggling the most from the decline in trading volume, according to Dickie Wong, Executive Director, Kingston Securities, who says most of his firm’s revenue last year was driven by financial consulting and initial public offerings (IPOs). Kingston Securities is one of the largest Hong Kong brokerage firms by market cap.

“Overall turnover is quite flopish and this is also the reason why those local brokerage firms had a hard time in the past two quarters,” Wong said.

Growing competition among Hong Kong brokerage firms has led to trading commissions as low as 0.03 percent compared to a minimum commission of 0.25 percent in 2003, which Wong says leaves no room for small firms to “sustain” their business amid low volumes.

“Big banks (have) also introduced trading discounts and have trading platforms on the Internet. So actually it’s much easier for some local investors if they’re not trading stock too often — they can do banking and trading on the same platform.”

“If they cannot provide low commissions, there’s no reason for investors or traders to stay in a small brokerage firm,” Wong said. “The largest brokerage firms have the biggest market share and they’re also gaining market share. And the local, smaller brokerage firms are just losing market share.”

But Chan of Shenyin Wanguo argues that larger firms that have expanded dramatically in the last few years also have a bigger cost base, which puts them in trouble amid low volumes.

“We didn’t have to cut a lot of cost. In the last couple of years we haven’t expanded, so therefore, we don’t have the same bigger cost base that some houses have got,” he said.

Large Singapore brokerages such as Maybank Kim Eng and CIMB Securities have told CNBC that a drop in trading volumes has also had an impact on their business.

Carol Fong, CEO, CIMB Securities said that in the current market conditions retail commissions account for about 30 percent of overall revenue, down from 40 percent in stable market conditions. The firm has seen a 10 to 20 percent decline in trading volume in the last two months with retail flows down 20 to 25 percent.

Fong also says small brokerages with less products to offer are suffering in the low market volume conditions.

“Take Singapore for example, the daily market turnover has dropped from an average of $1 billion to $800 million,” Fong said. “I would say that for the small brokerage retail firms in Singapore, they should be feeling the heat quite a bit.”

Alternative Brokers Gain

While some brokerages are feeling the pain, firms that specialize in derivatives like Contract For Differences (CFD), which allow investors to bet on market gains as well as declines in a variety of asset classes such as equities, foreign exchange and commodities, are seeing a substantial spike in volume.

Justin Harper, Market Strategist for IG Markets, which specializes in CFDs, says foreign exchange trading activity in Singapore increased about 20 percent in May from April as investors looked to take advantage of the market volatility.

“We sort of trade on volatility, you can get in and out of the market very quickly, they can go long and they can buy and sell very quickly and go very long or short, so that’s good for our business,” he said.

Harper says the euro dollar pairing — one of the key currencies hit hard by the euro zone crisis — is making up bulk of their trading right now.

“Anytime there’s sort of big announcement in the euro, we see increased volatility there and people coming on board to try and get the swings up and down.” Harper said. “The volatility we’re seeing at the moment is attracting a lot more investors to us.”

By CNBC’s Rajeshni Naidu-Ghelani.

Correction: An earlier version of this story identified Carol Fong as the Chief Operating Officer (COO) of CIMB Securities. She is in fact the CEO.