Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on July 27, 2020 - August 2, 2020

IN the last 15 to 20 years, brokerage firms have been operating in a low-fee environment. Not helping matters was the low trading volume on the local bourse.

That is because of the rise of online trading, which has also caused the cost of intermediation to fall drastically.

In addition, the Asian financial crisis of 1997/98 left retail investors badly burnt and many abandoned the stock market — until recently. Thanks to the recent rally, retail investor interest is back.

Bursa Malaysia data shows that year to date, net retail investments on the local bourse reached RM5.83 billion, exceeding the RM2.45 billion for the whole of last year. The local institutional participation rate now is 48.4%, with retail investors at 38.3%, and foreign investors making up the remaining 13.3%.

The FBM KLCI has rebounded by 31.7% after hitting a low of 1,219.72 points on March 19, the day after the start of the Movement Control Order (MCO), to close at 1,589.61 last Friday.

As the benchmark index entered a bull market, the stock market went on to chalk up a record daily volume of 12.5 billion shares last Monday. It had recorded its highest daily value of RM9.38 billion in shares traded on May 29.

The Edge CEO Morning Brief last Tuesday reported that, since its inception, Bursa Malaysia had seen only five instances of its daily trading volume surpassing the 10 billion shares mark, with all of them happening this year. This month alone, it breached that level thrice.

While the recent rise in trading interest is a welcome relief to brokerages, especially the non-bank-backed ones, the long-term outlook for the industry remains challenging.

The CEO of a local non-bank-backed brokerage says that, in the past five years, except 2020, stockbrokers have experienced declining brokerage incomes, owing to low market volume and interest from retail clients, as well as fierce competition, which has driven commission rates down.

“Moreover, many institutional funds, especially the government-linked funds, were also looking offshore for higher returns last year. As such, the imposition of the MCO was a huge relief to market activity,” he says.

Nonetheless, the relief is expected to be only temporary. The CEO believes that, over the next five years, the stockbroking industry’s prospects will be bleak, as businesses, except glove makers and pharmaceutical companies, will experience shrinking revenues and squeezed profits.

To survive, he says, brokers would need to broaden their income streams by diversifying their services and cross-selling. They should also leverage technological innovation in the provision and delivery of services to investors.

“That’s why we hope to cross-sell corporate finance business with corporate clients, and expand placement services and the underwriting of corporate exercises. Consolidation, scaling up and widening services are natural progressions in order to survive in our current market in the next few years,” he adds.

According to CGS-CIMB Securities Sdn Bhd deputy CEO and regional head of retail, Alan Inn, the industry is undergoing an interesting period of high trading volume in the market.

“The last time we saw this in Malaysia was back in the 1990s. It is a very cyclical industry, not just in terms of trading volumes, but also credit risk,” he tells The Edge.

Looking ahead, Inn sees competition not just from other online trading platforms — traditional or digital brokers — but also from platforms that offer investment alternatives, notably digital assets such as Bitcoin.

“The industry needs to be more digitalised and engage with the younger generation of investors. It also needs to achieve economies of scale and lower its cost of doing business to survive in this very competitive business,” he says.

 

‘The future of stockbroking is digital’

Rakuten Trade Sdn Bhd acting CEO and chief marketing officer Kazumasa Mise concurs that the future of stockbroking is digital. As such, he says, all firms must continue to evolve.

“The MCO period saw a surge in the number of activated accounts for Rakuten Trade, as this was considered a zero-contact phase. The contactless mode of trading resonated greatly with our primarily millennial target market, who are typically digitally savvy,” he says.

Mise adds that as the industry evolves further and becomes more digital, competition among online trading platforms will heighten, depending on the services and convenience provided.

RHB Investment Bank Bhd head of group retail equities and futures Eddy Tan points out that being an alternative trading channel, online trading complements rather than competes with the traditional channel of remisiers.

“The investing public has become savvier and increasingly relies on investment guidance to make informed investment decisions. Thus, we see the continuous shift from a reliance on remisiers to independent trading. We expect this to be the way forward for the broking industry in Malaysia,” he says.

On RHB’s part, Tan says while its brokerage fees are aligned with the industry, it aims to provide value-added services instead of just focusing on rates.

“Online brokerage is fully negotiable and we will also compete on this aspect to retain customers. However, we will continue to invest and expand investor education to the wider investment community,” he adds.

Affin Hwang Capital deputy group managing director Yip Kit Weng says the firm is aware of the stiff competition posed by online brokers to an already-competitive traditional broking industry, the same way emerging technologies and disruptors have affected other industries.

“We are working intensely to evolve to remain relevant to the investing community. Our online trading platform, eInvest, is part of our innovation plan to prepare for future growth in online trading,” Yip explains.

The associate director of a foreign-owned securities firm notes that, in the last five years, brokerage income has been declining, while fee-based income has been increasing.

“With direct market access, we may see a further decline in brokerage income, but hopefully, it can be compensated by fee-based income,” he says.

There are about 30 stockbroking firms in Malaysia. A check with the Companies Commission of Malaysia shows that TA Securities Holdings Bhd, Mercury Securities Sdn Bhd and M&A Securities Sdn Bhd have been generating stable profits over the past five years.

Meanwhile, the earnings performance of JF Apex Securities Bhd, Inter-Pacific Securities Sdn Bhd, Malacca Securities Sdn Bhd and SJ Securities Sdn Bhd has been rather lumpy.

According to their latest available full financial-year results, FA Securities Sdn Bhd, PM Securities Sdn Bhd and Rakuten Trade Sdn Bhd were still loss-making.

 

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