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

HUATAI International, the Hong Kong arm of one of China’s largest brokerages, recently shook the brokerage industry in the special administrative region when it announced that it would scrap commissions for stock trades.

The move comes nine months after US-based online brokerage giant Charles Schwab Corp did the same in an effort to take on fintech start-up Robinhood, which began the commission-free trading trend six years ago, according to media reports. Last October, Charles Schwab cut its trading commissions to zero, forcing rivals E-Trade, Interactive Brokers and TD Ameritrade Institutional to follow suit in a matter of weeks.

The zero-commission trading model looks to take the world by storm, but brokerages in Malaysia have no intention of doing away with commissions just yet.

The markets are different, says Kazumasa Mise, acting CEO and chief marketing officer of Rakuten Trade Sdn Bhd — itself a disruptor of the traditional equities trading market when it emerged three years ago.

“The US and Hong Kong markets are quite different and a lot larger compared with Malaysia in terms of market size, investor base and trading value. We believe our current fee structure is relevant to our market given the current landscape,” he tells The Edge.

“At Rakuten Trade, we prefer a more affordable and transparent fee structure instead. We believe bricks-and-mortar stockbroking still has a place in Malaysia, which means a certain amount in fees needs to be charged for the services that are provided,” he adds.

The no-fee business model has also raised questions as many investors believe there is no such thing as a free lunch. The disruption has even prompted the merger of Charles Schwab and TD Ameritrade.

Mise observes that not all brokerages in Hong Kong and the US offer free trades. “If they do, they make it up through other avenues or fees,” he says.

Bloomberg reports that one way US brokers make up for lost income is through payments for order flow, when they sell customer orders to wholesale market makers who profit off the bid and offer spread. They also earn money by investing their cash reserves in relatively riskless bonds such as US Treasuries.

Watching the zero-fee race closely is CGS-CIMB Securities Sdn Bhd deputy CEO and regional head of retail Alan Inn. He says local brokerages will not join the bandwagon “if stockbrokers want to make an acceptable level of return for their business”.

Some basic requirements also need to be put in place before the zero-commission business model is introduced, such as providing brokers with the ability to sell the retail orders to market makers or other market players, he says.

“The authorities and retail market will also need to be supportive and understand the implications. Of course, any broker can now disrupt the market by offering very low or zero brokerage fees — we will have to see what the results and response will be,” he adds.

Inn notes that several factors may be underpinning the pricing development in the US and Hong Kong, such as greater economies of scale in large global markets and the monetisation of the back-end business, such as selling of retail orders to market makers.

CGS-CIMB Securities head of retail, products and channels Louis Teh Chin Siang concurs. “Like in the other markets, it will take time for the players to process and digest any new developments. They will likely want to see if the disruptor can survive.”

Taking the future of zero-fee trading in stride

Affin Hwang Capital deputy group managing director Yip Kit Weng believes it is only a matter of time before Malaysia joins the advanced markets in the move towards zero brokerage fees.

“Local players will eventually have to change their business strategy to remain relevant and competitive.

“We foresee Malaysian brokers shifting towards zero brokerage to remain competitive. However, this may not happen in the immediate future. We feel that to make this happen, brokers will need to innovate and change their business model to remain relevant,” he says.

“They will have to establish alternative sources of income to sustain their business model such as the sale of order flow to high-frequency and proprietary trading firms,” he adds.

Eddy Tan, head of group retail equities and futures at RHB Investment Bank Bhd, says the current low- or no-commission marketplace is driven by the development of the independent investing community where brokerage services are not required.

“These investors have access to market information and intelligence where brokerage services are not offered. In such markets, investors’ choice of brokers is driven by low commissions or platform fees alone. Aggressive competitive pricing leads to reduced investment in research advisory, and the trading platform itself is focused on only order entries instead of providing value-added services.

“In Malaysia, demand for advisory services provided by remisiers or dealers remains strong given existing investor habits. Brokers can differentiate themselves through ‘high touch’ services such as face-to-face engagement to retain and develop customer relationships.”

The CEO of a local non-bank-backed securities firm recalls that Jupiter Securities Sdn Bhd was the first in the brokerage industry to cut its fees to zero back in 2000.

“At the time, many brokers were against the idea while Bursa Malaysia relented to stop fully negotiable rates. Subsequently, the regulator allowed internet rates to be fully negotiable at a minimum rate of RM40,” he tells The Edge.

The CEO believes Malaysian brokers will not be able to cover the cost of providing their services if they do not charge for every trade.

“It makes sense only if brokers charge active traders or clients a fixed monthly subscription and the rate must be high enough to break even. Therefore, I don’t think local brokers want to cannibalise the existing client base and ‘kill’ themselves competing in a losing business,” he says.

Currently, retail stock investors have to pay a broker’s commission, stamp duty and clearing fees for trade done here.

Affin Hwang Capital’s Yip says a brokerage fee war has been going on for the past two to three decades.

“[The situation] will continue to evolve and market players will have to develop an appropriate strategy to remain relevant in the industry. As investing clients mature, brokerage fees will no longer be the only determining factor for them to perform trades.”

RHB’s Tan points out that some local brokers are already engaged in a fee war to achieve scale, but adds that ultimately, brokers need to strike a balance between sustainability and continuous margin compression.

“Most brokers invest heavily in technology and automation, as well as in providing investment advisory services to stay relevant instead of aggressive fee competition,” he says.

The CEO of the local non-bank-backed securities firm echoes the sentiment, noting that brokerage fees in Malaysia have already hit rock bottom. “The brokers’ fee war is already happening. Everything has gravitated to the floor until it doesn’t make business sense. We don’t have many new entrants in the industry because being a remisier is no longer a lucrative job,” he notes.

Online trading overtakes human touch

Rakuten Trade’s Mise says embracing digitalisation is inevitable as evident during the Covid-19 pandemic. “We believe the global stockbroking industry is heading in that direction to remain sustainable.”

Mise notes that the recent Movement Control Order (MCO) has clearly demonstrated the need to be nimbler, with technology taking the lead. “As a result, we expect to see more brokerages reinventing themselves and this will be reflected in their fee structure.”

On its part, Rakuten Trade recently introduced the RakuMargin platform — the country’s first automated third-party margin facility that allows investors to trade using available funds and/or with a pre-approved facility limit of up to RM100,000.

In less than four months, more than 2,000 RakuMargin accounts were activated, contributing to more than RM100 million in trading value on Bursa Malaysia. “About 53% of the total activated accounts were from existing clients, which shows their confidence in a fully digital equity trading platform,” says Mise.

“Investors’ response to our RakuMargin product, despite the lockdown, confirmed that we are on the right course. We are looking to add new products to support retail investors and will make an announcement in due course.”

Rakuten Trade, a joint venture between Kenanga Investment Bank Bhd and Japan’s Rakuten Securities Inc, has managed to grow even as it disrupted the brokerage industry when it started offering flat brokerage fees in 2017. Its brokerage fees are the lowest in the industry, ranging from RM7 to RM100, depending on the traded value.

“The fintech business model enables companies like us to keep operating costs low and conduct business with a lean team, passing on the savings to our clients in the form of lower fees,” says Mise.

Today, the online brokerage credited with revolutionising electronic trading has more than 110,000 accounts. Since its inception, it has contributed to more than RM20 billion in total trading value on Bursa Malaysia, while its retail market share and clients’ assets under trust stood at almost 7% and more than RM2 billion respectively as at July 14, 2020.

A check with Rakuten Trade’s trading platform shows that it has been experiencing “unprecedented” high traffic volume since the start of the MCO in March. “Many shares were below their historical prices, creating an opportunity for new investors to enter the market,” says Mise.

“Our clients generally appreciate the ease and convenience of using a ‘zero contact’ and ‘low fee’ trading platform, and the demand for this has grown exponentially since the MCO. We appeal to a younger group of investors below the age of 40 — particularly those with no prior investment experience,” he adds.

CGS-CIMB Securities’ Teh says the brokerage firm’s online trading volume more than doubled during the MCO period.

“We already had a very high proportion of our business online before the MCO. The MCO got us first-time investors and investors who were inactive before this,” he notes.

CGS-CIMB Securities currently has more than 100,000 active accounts, with its retail customer segment accounting for 5% to 6% of Bursa’s trading volumes.

Inn points out that CGS-CIMB Securities’ trading volume is predominantly online not just in Malaysia but also in the other three countries — Singapore, Indonesia and Thailand — where it runs a large retail business.

“The proportion is over 50% online for all countries, with Malaysia being a lot higher and in fact the highest. In China, this figure is 97% for our other shareholder, China Galaxy Securities Co Ltd. Online trading is also growing at two to five times that of the non-online channel, with trading via mobile applications leading the way,” he adds.

RHB’s Tan has also seen online trading gaining significant traction, both among the young and seasoned investors.

“During the MCO, we saw increased trading activities by customers as well as remisiers and dealers who were supporting the customers via our mobile trading platforms while working from home. There was also a surge in applications for the opening of new accounts, primarily for online trading, during the MCO,” he says.

“We are fortunate in Malaysia that mobile and e-penetration levels are high, therefore even more sophisticated and mature investors are not averse to executing their trades on digital platforms.

“Remisiers also prefer online platforms as they allow them to focus on servicing their clients instead of just order taking, entry and confirmation. Online trading has very much become the norm for executing transactions,” adds Tan.

RHB’s market share in terms of volume and value traded on the local bourse stood at 10.82% and 8.81% respectively as at June 30, 2020.

Affin Hwang Capital’s Yip says the contribution of its online trading platform, eInvest, to the growth of the firm’s retail market share in the first half of this year was over 40% and to overall value traded of its securities business was around 65%.

“During the MCO, there was a noticeable increase in traffic volume through eInvest. The system was built to cater for high traffic volumes. This further reinforced our belief in the future growth of online trading and this will further drive our efforts in accelerating our growth in the digital online trading platform,” he notes.

“We will soon be offering a basic self-service trading product without technical assistance, with only a minimum brokerage fee.”

What the regulator says

As Malaysian investors become increasingly sophisticated and diverse in how they interact with the capital market in tandem with the evolving technology and changing demographics, the Securities Commission Malaysia (SC) says intermediaries within the securities market would also need to evolve and transform to cater to the diverse and ever-changing needs of the investors.

The regulator takes cognisance of these, noting that the market structure needs to enable such diversity and innovation in intermediary models that can offer niche value proposition, which may be based, among others, on the extent of use of technology, investor segmentation or multi-asset capability.

It cited intermediary models such as digital-only brokers, which may be better suited to investors looking for no-frills services, while algorithmic trading platforms or multi-asset brokers can be beneficial for investors with more sophisticated needs.

“The SC is now working with Bursa Malaysia to facilitate changes to the stockbroking licensing framework to allow for the entry of new players with differentiated value propositions, flexible business models with efficient capital structures, which will attract a larger pool of specialised market participants to spur greater capital market innovation and enhance value for the investors taking part in the market,” says an SC spokesman in response to questions from The Edge.

“With the separation of trading and clearing membership, entities may participate in our market as standalone trading participants, standalone clearing participants or integrated trading-clearing participants.

“Trading-only participants may focus on business models catering to investor needs with innovative products and services, while clearing-only participants can bring about greater post-trade efficiency to the ecosystem. Consequently, securities brokers will have the option to outsource their clearing and settlement commitments to a third-party clearer,” the spokesman adds.

Amid a low-fee brokerage environment, the number of remisiers joining the industry has also been on a downward trend over the years. SC data shows that there were 4,424 registered remisiers as at June 30 this year, down from 4,786 as at Dec 31, 2015.

Nevertheless, the SC spokesman thinks as the market evolves and sees increasing diversity in investor needs and demands, there will be segments of investors requiring a variety of advisory services that could also cut across multiple assets.

“Remisiers would similarly have to adapt and reposition themselves to meet the evolving needs of investors and offer greater value-added services to their clients. This includes leveraging technology to better complement their services and enhance value for their clients.”

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