Small brokers are
launching a last-ditch effort to continue the indefensible minimum
commission rate set by the SEHK, due to be scrapped on 1-Apr-02.
Webb-site.com urges the Government to ignore them - the market is run for
customers, not for brokers. Let the competition begin! |
Scrap the Cartel
31st October 2001
Local reports have it that small brokers are meeting with
Financial Secretary Antony Leung Kam-chung this Saturday (3-Nov-01) in a
last-ditch effort to delay the onset of competition in the sector. The Stock
Exchange's antiquated minimum commission rule, fixed at 0.25%, is due to be
scrapped on 1-Apr-02.
This is one Halloween nightmare that we do not need. The issue
here is very simple - should any sector of our supposedly free-market economy be
allowed to perpetuate anti-competitive practices, such as price fixing? The
answer must surely be "no". Despite this, the domestic economy retains
far too many cosy cartels and
oligopolies. One of the biggest cartels, on bank savings rates, was only
scrapped on 1-Jul this year.
Hong Kong and Malaysia are the last remaining markets in Asia to
have minimum commissions, and Malaysia too will scrap the rule in Jul-02. We're
just old enough to remember first-hand the scrapping of fixed rates In London,
which took place in the "Big Bang" of 15 years ago, on 27-Oct-1986.
It is certainly true that many of our 400-odd small brokers will
close or be taken over. Some of these are "mom-and-pop" shops who have
neither the resources nor scale to compete. So what? The market does not exist
for the benefit of brokers, but to facilitate trade between investors and
issuers. The small brokers by definition employ relatively few staff, some of
whom will find jobs as the larger, competitive brokers expand their market. We
cannot plan sectors of the economy to maximise employment - that is against the
whole essence of the free market and is what sent China into its 3 decades of
economic decay before the 1980s.
The brokers have already been more than paid-off for giving up
their cosy members' club. One must remember that each and every member of the
old Stock Exchange of Hong Kong Limited (SEHK) received
805,000 shares in the new Hong Kong Exchanges and Clearing Limited (HKEx)
which was floated last year. At the same time, they got to keep their trading
rights even if they sold their shares.
Those shares reached a high as $19.00 on 1-Feb-01, and even at last night's
close today are worth $10.50 and have paid dividends of $0.41, meaning each
broker's allocation is now worth $8.78m and reached a high of $15.30m.
That was a huge windfall when you consider that the old SEHK was a not-for-profit
body that was not allowed to distribute any dividends, and the clearing company,
HKSCC (which was also not-for-profit), was thrown into the valuation even though
the SEHK did not previously own it.
The small brokers are currently lobbying for a retention of the
minimum commission where it could do most damage - at the retail level of the
market. They want to set a minimum transaction size (say HK$1m) below which
minimum percentage commission would apply.
That would simply penalise the vast majority of investors (by
number) who trade in smaller amounts, while cross-subsidising the institutional
clients. Brokers who could collect fat profits from small investors would be
able to offer smaller commissions to institutions than they could otherwise,
thereby shifting the benefits of competition to the bigger customers.
A level playing field is essential for a free market. Brokers and customers
must be free to negotiate whatever rates they like, individually. The reduction
of commission rates will spur higher volume, since it reduces the
"friction" of transaction costs. So some of what the brokerage sector
loses from lower rates will be made up in higher volumes.
With straight-through electronic trading (AMS/3) and electronic
settlement (CCASS), it costs virtually the same amount to process a $1m trade as
it does to process a $10,000 trade. Consumers can look forward to flat-rate
commissions regardless of transaction size - do we hear $88 per trade? $58 or
$38 perhaps?
Let the competition begin!
© Webb-site.com 2001
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