Asian Business Issues - Rants & Raves, Illusions & Collusions etc.
Wednesday, March 12, 2014
The Shrinking Singapore Broking industry
What is ailing the Singapore broking industry? My comments alongside the Bloomberg article in blue.
Singapore’s shrinking brokerage industry is set to get even smaller as trading restrictions planned by regulators dent profits, according to a body that represents individual brokers.
The average daily value of shares tradedin the city, which slumped 40 percent in the first two months of 2014 from a year earlier, will decline further should rules be implemented that include requiring collateral for some trades and shortening the settlement period, said the Society of Remisiers, which represents dealers who work entirely on commission. Singapore Exchange Ltd. and the Monetary Authority of Singapore proposed the changes after a penny-stock rout in October erased $6.9 billion in market value of three companies over three days.
“More people will leave the industry as they’ll get less business,” Jimmy Ho, president of the Society of Remisiers, said by phone. “Once they cut the settlement period, there will be less speculative trading and it will drag overall volumes.”
The number of stockbrokers in Singapore fell 8.4 percent percent to 3,973 at the end of last year from 4,336 in 2011, according to data from the bourse, as the industry was buffeted by declining trading volumes and commissions as well as competition from online trading platforms. The city’s benchmark Straits Times Index trailed all its major developed-market peers in the past 12 months and slid 1.2 percent this year through yesterday.
Even after Singapore Exchange teamed with Singapore Management University and CIMB Group Holdings Bhd. (CIMB) in April 2012 to provide training programs for the industry, traders’ ranks continued to thin. This year, the bourse partnered with the National Trade Union Congress’s Employment & Employability Institute to bolster interest in the profession.
Comment: SGX made the first boo-boo which killed market velocity, that is making the trading in penny stocks into decimal places. In Malaysia it is still minimum 0.005 sen per bid. Obviously when you staff SGX with more MBAs and legal heads, you are not going to get rules that promote trading. They went by the textbook rule in that the smaller the bids, the bigger the volume. Here is where textbook fails to understand market participants' psychology. In Singapore, there are too many penny stocks, and I mean really pennies ... those under 20 cents. When the bid and offer looks like this 0.033-0.034 it does not make for more attractive trading compared to Malaysia's 0.030-0.035 ... the psychology is that in a single bid traders and punters are already making money and able to cover comm, that makes it "attractive" to big punters or syndicates to move a stock a few bids. In Singapore, you would see huge volumes at every bid and offer thus making it arduous to move stocks. Penny stocks are by nature speculative and you have to make it more conducive for them not make it harder for them to make (and lose) money. Though your propensity to lose money would also shrink in Singapore penny stocks, that is not the aim of punters (minimise losses), its to make the big gains.
“Brokerages are able to cope with fewer dealers because trading volumes are lower,” Society of Remisiers’ Ho said. “That’s a natural adjustment for the industry.”
It will be hard to draw young people, given the high risk and low commissions, said Yeo Aiqi, 28, who left Phillip Securities Pte, the city’s biggest brokerage by clients, in 2011 after working three years there.
“Stockbroking appears to be a sunset industry,” Yeo, who now sells women’s apparel at her online store www.clothingcandy.com, said by e-mail. “Trading volumes are low and commission rates are falling.”
The average value of shares traded on the Singapore boursetumbled 40 percent to about S$1.06 billion ($836 million) in the first two months of 2014 from S$1.77 billion a year earlier, according to data compiled by Bloomberg. Transactions in Hong Kong fell 11 percent in the same period, while those onJapan’s Topix index increased 17 percent.
Blumont Group Ltd. (BLUM), Asiasons Capital Ltd. andLionGold Corp. tumbled at least 87 percent over three days in October, prompting the city-state’s central bank and bourse to review its equity market structure. The companies said they didn’t know what precipitated the plunges, which spurred at least a dozen lawsuits from banks and brokers seeking to recover losses on collateral held against margin loans.
SGX introduced circuit breakers last month to minimize volatility in share prices and is seeking feedback from the industry before it implements the collateral and settlement period changes.
While the move is meant to revive investor confidence, it won’t improve the outlook for brokers, said Gabriel Yap, who left the industry in 2009 after 19 years as a trader.
“The casualties of the penny-stock saga are the stockbrokers,” Yap, who now manages his own investment advisory firm, said by phone. “If the clients don’t pay, the dealers or the remisiers will have to cover.”
To make the profession more appealing, SGX needs to address dwindling volumes to counter the decline in brokerage commission rates, which have fallen to 0.1 percent of the value of shares traded from 1 percent 10 years ago, according to Yap.
“Brokers have nothing exciting to recommend to their clients these days,” Yap said. “Trading was buoyant before I left the industry due to the influx of Chinese listings and now investors are avoiding such companies after a number of them got embroiled in accounting or stock manipulation scandals. SGX promoted the listing of real estate investment trusts in the past decade but interest in them is starting to wane.”
At least 28 Chinese firms on the exchange have been suspended or delisted since 2008. There were 144 China-based firms listed in Singapore at the end of February, according to the exchange. The FTSE Straits Times China Index of 31 mainland stocks sank 7.3 percent in the past 12 months.
Comment: Lack of cowboy-ness in SGX. When you sanitise the markets too much, it becomes boring. Every exchange needs a certain element of cowboy-ness (including markets like S&P500 and Nasdaq) to maintain relevance and interest. They way SGX is headed, you might as well list all boring ETFs and kill off the broking industry. When you shrivel the market into mainly blue chips that move, you institutionalise the entire industry. When the speculative counters do not present trading opportunities, investors and punters will just ignore and shy away. Casinos are there on the pretext that you can make supernormal gains, if that is not present, even casinos will close shop. What SGX has been doing for the past 7 years is like a casino which limits your gains, e.g. if you make S$10,000 then your bets are halved, etc... In protecting the investors, you can somehow err on the side of caution. There is little to justify the big salaries at SGX and the trading fees collected by SGX. They way they clamped down on "cowboy-ness" and the proliferation of REITs are just examples of going the "wrong way" unless what they want is to shrink the industry.
Singapore REITs had the third-worst return in the Asia-Pacific region in the past 12 months as rising bond yields made the securities less attractive, according to data compiled by Bloomberg. The FTSE Straits Times REIT Index tumbled 13 percent in the period, compared with a 5 percent decline for the benchmark Straits Times Index.
Stockbrokers are competing against online trading platforms for business. Retail investors in Singapore are increasingly using websites and apps to trade shares amid growing use of mobile gadgets, according to a report by researcher Investment Trends.
About 51 percent of the 460,000 brokerage clients in the city traded shares online in the 12 months through September compared with 49 percent a year earlier, according to the report.
On top of imposing minimum collateral requirements on investors and reducing the settlement period for stock transactions to two days from three by 2016, the city-state may also set up an independent listing committee and boost enforcement, SGX and MAS announced on Feb. 8.
The proposals will help in “promoting orderly trading and responsible investing” and “improving the transparency of market intervention measures,” the central bank and exchange said in a statement at the time.
The Securities Association of Singapore can’t comment on how the proposed changes will affect brokerages pending consultation with its members, Melinda Sam, chief executive officer of the organization that represents trading firms, said by phone. The group will submit its position paper by the May 2 deadline, she said.
Some stockbrokers have given up waiting for an industry revival.
“The risk to reward just doesn’t work out,” Chin Chung Hwa, who quit his job as senior vice president of corporate broking at CIMB Securities Singapore Pte. in December. “I left the industry to join private banking because it’s more stable and clients must put money upfront.”