Scrap the Cartel
31 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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