Hong Kong’s Small Brokers Are Disappearing at a Record Pace
Hong Kong’s Small Brokers Are Disappearing at a Record Pace
(Bloomberg) -- Family-owned brokerages once reigned in Hong Kong, tapping close-knit networks of clients in a city with few regulations that relished a quick buck.
Now, in an era of algorithms, online trading and growing dominance of big banks, the hundreds of small brokerages are losing their relevance. Add the economic toll of city’s yearlong political unrest, the trade war, and a virus outbreak, and its trading houses are closing at a record pace.
“The virus outbreak is really the last straw for the brokers,” said Gordon Tsui, chairman of the Hong Kong Securities Association, who estimates more than 30 could close this year after a record 22 folded last year.
The pandemic-fueled trading boom at the start of this year underscored how far behind local brokers have fallen. With just a 7% market share split between nearly 600 small firms, the lion’s share of fees from the first quarter’s boisterous trading fell to big banks such as Goldman Sachs Group Inc., which handled more than 60% of transactions. New startups are also piling in, crunching down already thin commissions, and they are easy acquisition bait for mainland China brokers.
The biggest misstep was failing to keep pace with the technological shift of trading. Back in the 1980s, people would visit brokerages to place orders and sniff out rumors. The local firms were known as “gold fish tanks” because of glass separating the traders from the many onlookers. At the end of colonial era, they had about 40% of the market after decades of go-go years when the markets weren’t only an obsession of the city’s rich, but also its blue-collar workers and housewives.
Then came the internet. Now more than 65% of retail investors swap stocks online, with only 1% still heading down to the broker, according to the government-backed Investor and Financial Education Council.
One survivor is Bright Smart Securities and Commodities Group, which invested in infrastructure to enable online trading all the way back in 1995, at a time when few Hong Kongers had even heard of the internet, said Edmond Hui, the firm’s chief executive.
Many rivals have missed out on the younger generation, while their existing clients are aging and trading less, he said. A veteran of the old brokerage cluster in the city’s Sheung Wan district, Hui said it wasn’t a lack of cash that caused them to fall behind.
“The old brokers are rich,” he said. “They just don’t think IT infrastructure was necessary because they rely on a handful of loyal clients and it has worked well for them for decades.”
As elsewhere in the world, trading fees have also hit rock bottom. In Hong Kong, there has been a price war for close to two decades since the city scrapped a fee floor of 0.25% in 2003. Upstarts are also piling in. With Chinese online brokers such as Tencent-backed Futu Securities coming in, trading fees are being brought in line with those on the mainland, dealing a blow to Hong Kong’s brokerages, said Amanda Xie, the regional manager of online broker Usmart Securities.
A push into more lucrative businesses such as margin financing was also squashed as the city’s regulators over the past years cracked down on suspected shell companies to prevent often wild share moves seen in the city’s smaller stocks.
A typical small broker has about 12 licensed staff, which cost about HK$500,000 a month, according to Tsui. Even during an upbeat trading environment, many are struggling to break even and cutting employees isn’t an option since every firm needs a certain number of licensed staff to stay in operation, he said.
Firms such as F. R. Zimmern Ltd., Gold Fund Securities Co. and Tai Ping Kong Ltd. have this year handed back their licenses after decades of trading.
Others stepped out earlier, in part cashing in on a wave of mainland Chinese brokers entering the city. David Tung Wai, known as the “King of the Cigar,” sold his life-long business to a China’s Zhonghua Financial Holdings in 2016 after years of advising media tycoon Run-run Shaw and shipping heavyweights Pao Yue-kong and Tung Chao-yung.
Another veteran of the Sheung Wan days is 82-year-old Cheung Tin-sang, who’s still trading at Luk Fook Securities (HK) Ltd. His previous firm, Sun Hung Kai Securities, was acquired by Chinese mainland brokerage Everbright Securities in 2015.
He’s now fielding calls from former colleagues looking for jobs. “But what company would hire a new guy in his sixties?” he said. “I’m sad that I can’t help much.”
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