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

AS more brokerages in the US and Hong Kong do away with commissions for stock trades, local stockbrokers and remisiers say it is only a matter of time before their Malaysian counterparts jump on the bandwagon.

The brokers and remisiers The Edge spoke to are bracing for the “inevitable”.

Still, the reduction of trading commissions to zero is unlikely to happen in the immediate future, giving brokers and remisiers some breathing room.

“My view is that the zero-commission trading environment is unlikely to happen in the next 10 years simply because our financial industry is not advanced enough to adopt this business model yet,” says Ng Soon Kiat, a commissioned dealer’s representative of a local investment bank.

Deeming current brokerage fees in Malaysia “quite fair”, he doesn’t think brokerages would cut them further. “I don’t see a brokers’ fee war happening here unless the government decides to fully liberalise the market by allowing foreign brokers to compete with local firms. However, I believe local brokerages should stay protected.”

An institutional broker, who spoke on condition of anonymity, concurs. “I don’t think this (zero-fee trading) will happen so soon, at least not in the next five years. Investors in Malaysia still believe in calling remisiers for advice. However, when MiFID II (new European regulations requiring securities firms to separate research fees from trading commissions) comes into play, commission rates will come down more.”

Local brokers and remisiers have seen their commission income fall in recent years as commission rates have shrunk with the growth of online trading and decline in trading volumes. Some have even predicted the demise of remisiers.

According to the institutional broker, brokers earning 1% commission for institutional trades in the 1990s now make as little as 0.15%.

“In a way, better technology is making it easier for (individual) traders to execute their trades and this has affected the commission rates. In the last five years, the rates for institutional brokers have remained at between 0.1% and 0.25% that are applicable according to clients,” he says.

Six years after US-based online broker Robinhood launched with the zero-fee model, major broker Charles Schwab Corp scrapped its trading fees last October, forcing TD Ameritrade, E-Trade and Interactive Brokers to follow suit. Early this month, Hong Kong brokerage Huatai International brought zero-fee trading to special administrative region in order to maintain its existing client base and attract new clients.

The institutional broker notes that with the race to zero brokerage fees accelerating globally, local brokers will have to start thinking of cross-selling other products in order to survive.

“Some brokers are moving into offering other products like better terms and rates for margin accounts and short-term borrowing.

“Eventually, we (brokers) will probably just provide research and market news to the institutional clients as they will still be willing to pay for research. However, execution of trades will probably be done by the clients themselves,” he says.

An associate director of a foreign-owned securities firm points out that some brokerages in Malaysia have already moved to zero fees.

“For the bigger deals, if the crossing of shares is done by the corporate finance side, the brokerage can be free as the securities firm has already made a fee from advisory work,” he tells The Edge.

“It’s inevitable that brokerages will eliminate commissions for all stock trades. They may eventually need to diversify to get fee-based incomes from corporate advisory, margin financing and discretionary financing.

“Having said that, zero fees for retail investors won’t be happening so soon. Our market is still very retail-driven. The Association of Stockbroking Companies Malaysia will still protect the remisiers from loss of income,” says the associate director.

In the meantime, the associate director believes brokerages will maintain the status quo on brokerage fees.

“Brokerage fees are already so miserable ... I don’t think stockbroking firms would lower their fees further.

“Unfortunately, the fee war is already happening. We are seeing cannibalisation of business even from the same company. For instance, Kenanga Investment Bank Bhd has a stake in online brokerage Rakuten Trade Sdn Bhd. Some Kenanga remisiers are complaining that their clients wish to switch their accounts to Rakuten as the latter’s rates are cheaper. Essentially, these are the same clients, but when they switch accounts, your brokerage income will become lower,” he adds.

Staying relevant despite technology disruptions

“The fact that young people are no longer interested in becoming remisiers tells you that this profession is not attractive anymore. Many remisiers are struggling to make ends meet. The ones that are left are already in their 50s and 60s. Most still carry on since they are old and it is hard to find another job. Even the youngest ones are probably in their late 40s,” says a remisier from a local brokerage.

With a little bit of money and a lot of time, the remisier notes that many young people are opting to become proprietary day traders.

“Unlike remisiers and brokers who are governed by the Securities Commission Malaysia, Bank Negara Malaysia and Bursa Malaysia, traders may not be so strictly scrutinised as they help keep markets buoyant. Our clients also pay brokers’ commission, stamp duty and clearing fees, while day traders pay negligible or zero brokerage fees. They may just share part of their earnings with the brokerage firm,” she says.

“The internet has made everything transparent. Today, remisiers can no longer be mere order takers. They have to provide value-added services such as research investment advice and handle clients’ queries to justify their commissions,” she adds, noting that some are still able to charge a 0.6% to 0.7% commission provided they offer good stock recommendations to their clients.

Says Ng, “The remisier profession is surviving. I wouldn’t go so far as to say this is a sunset industry because many investors still need us. Many of my clients still call me for stock ideas or to execute trades. Fortunately, they still prefer human interaction. But we can’t deny that this is a new era where human interaction is being replaced by artificial intelligence. This new trend of online stock trading is definitely attracting Gen X, Y, Z and millennials, although some might still prefer human interaction.”

He expects the online trading platforms to become more competitive going forward. “Nowadays, clients feel more excited about trading as they can watch the stock market live from their computers,” he says, adding that he has seen a surge in trading volume from clients during the Movement Control Order (MCO) period “because people stay at home and have more time to trade”.

“The stock market has been on a roll of late and that’s why brokers and remisiers can still survive, with some reaping huge profits. But bear in mind that when the market was bearish like in the past two years, some brokers and remisiers actually made losses. So, it really depends on the market sentiment and conditions,” says Ng.

The associate director agrees. “We have seen extremely high traffic since the MCO started [and] our server capacity has also been increased. The partial lockdown did accelerate the transition towards online trading.”

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.