OH, WHAT A STIMULATING TIME!
Re: Zero Brokerage Through Internet Trading
1) The Issues
PERIMSA is shocked to notice an article in the Borneo Post newspaper in Sarawak dated 7th Jan 2009 that CIMB securities is offering zero brokerage for trading through internet. The Star dated 26th January 2009 further publicized that CIMB is the only bank-based broking firm (BBBF) that offers zero brokerage.
The key issue here is that, firstly, the offering of zero brokerage by some participating organization (P.O.s) is directly affecting the livelihood of about 6,000 remisiers. This figure does not include the remisiers’ assistants.
The second issue here is that zero brokerage offered by BBBF create unfair competition in the sense that BBBF is in better position to offer zero brokerage because their main business is money lending and not stock broking. Therefore, BBBF can afford to forego zero brokerage in order to attract the opening of new accounts and at the same time to raise interest free deposit. This will help to lower down their costs of fund. When they lend out this zero-cost fund as consumer loans (e.g. housing, car and credit cards), this is where they make the additional margin to compensate for the zero brokerage. We believe non-bank based broking firms(NBBBF) do not have the luxury to offer zero brokerages because stockbroking is the main income.
Brief background history
In 2009 Budget, SC announces the rate for trading through internet is fully negotiable. We believe the main intention is to reduce the brokerage rate in order to promote internet trading for the investing public. Perimsa interpret that fully negotiable rate should not be equivalent to zero. For example, in Singapore, the authority is imposing a minimum brokerages of S25/- (or RM60/-) per transaction for internet trading.
2) Remisier’s concern
PERIMSA wishes to urge the authority to stop the practice of the zero brokerage as we can foresee this will eventually lead to an unhealthy price war among the participating organizations (P.Os.). This price war will be detrimental to the livelihood of about 6,000 remisiers and is damaging to the liquidity of the equity market. The reasons why we need to stop the zero brokerage are as follows;
1) Unfair competition: Zero brokerage offered by BBBF create unfair competition in the market place as their main business is not stock broking but money lending. BBBF has the flexibility to implement the tradeoff by offering zero brokerages to be compensated by higher margin from money lending to consumers
2) Price war; our main concern is that this will trigger a prolonged price war. It is quite imminent that other BBBF will use the same strategy to offer zero brokerage as sweetener in order to attract free fund or deposit for their money lending.
3) Remisiers’ main source of income: Brokerage is the only main source of income for our professional service rendered to clients. If the market offers zero brokerage, then how are we going to survive?
4) Survival of remisiers is at stake; If (2) above happens, it will threaten the survival of about 6,000 remisiers. Remisiers will be losing their clientele to BBBF who are offering zero brokerages.
5) Drastic drop in liquidity; The lower income will slowly drive the remisiers out of the industry. The drop out of remisiers will eventually lead to a drastic drop in the liquidity and velocity of the turnover which is damaging to our equity market
6) Zero brokerage is damaging: No commercial entities can survive with zero brokerages in the long term. In fact, there is a minimum brokerages of S25/- (or RM60/-) for internet trading in Singapore
3) Our proposal
On the premise of the above concern, Perimsa wish to propose to the authority the brokerage for internet trading(with or without cash upfront) as follows;
(1) There should be a minimum brokerage of RM28/- per transation
(2) There should be a floor rate subject to the maximum discount of up to 30% of the rate charge by broker assisted rate ( i.e. 0.42% for trade below RM100,00/- and 0.21% for trade above RM100,000/-)
The above proposals are justifiable because it cannot be over emphasized that internet facilities merely provide traders the convenience to key in their own trades. Remisiers are still required to provide similar pre and post trading functions as those offered to broker assisted clients. Example of pre trading services are providing market and corporate information and to provide research materials. Example of post trading services are to follow up the timely settlement of trades, assistance in exercising entitlements on right issues and other corporate actions and evaluation of trading limits. Remisiers also bear the inherent credit risks which include prompt settlement of contra losses and there is also the risks of execution errors which remisiers have to bear.
Perimsa fully object to the practice of zero brokerages by any P.O. because it is directly affecting the livelihood of about 6,000 remisiers. In view of the current economic crisis both domestic and global, our country is facing a drastic retrenchment in almost all sectors of the economy. In fact, average remisiers income have drop drastically by about 70% to 90% in 2008 as compared to 2007. The current offering of zero brokerage will further aggravate the income of remisiers.
As an analogy, what would happen to the entire life insurance agents if the authority implements zero commission for life insurance products? We would love to buy life insurance products at half the price. But what would happen to the life insurance industry?
With the current global economic and credit crisis, we believe all P.Os. and the authority (especially the Ministry of Finance) are sensitive to the livelihood of about 6,000 remisiers whose profession might be at stake.