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Monday, May 30, 2016, 12:36

HK stock brokers cry foul as fees crimp profits

By Bloomberg
HK stock brokers cry foul as fees crimp profits
Traders work on the trading floor of the stock exchange in Hong Kong on Feb 3, 2016. (AFP PHOTO / ANTHONY WALLACE)

HONG KONG - Brokers in Hong Kong are being slapped with fees vastly higher than peers elsewhere in the region, prompting claims that the national stock exchange’s rules aren’t just out-of-date and confusing, they’re eating into profits.

Hong Kong Exchanges & Clearing Ltd, like stock exchanges elsewhere, charges a fee for settling trades. At first glance, it’s a tiny amount: 0.002 percent of a transaction’s value. But it can never be less than HK$2. Because the average size of trades has shrunk, that mandatory minimum charge is a bigger headwind for brokers because it eats into a trade’s value.

Brokers’ frustration stems from how trading works in modern times. Years ago, a big order had a better shot at being executed all at once. Today, electronic trading strategies tend to slice up bigger orders into smaller slices, so the HK$2 minimum matters more. The fees add to rising competition and falling commissions to make some trades barely profitable, executives from Credit Suisse Group AG and Nomura Holdings Inc.’s brokerage unit Instinet LLC said.

"The market has advanced significantly over the past decade and it is time tochange,” said Hani Shalabi, head of Asia-Pacific advanced execution services at Credit Suisse. “Hong Kong exchange is becoming more and more expensive to trade every year. Measuring profitability can be challenging.”

Fee Trigger

About 90 percent of trades filled by the Hong Kong exchange trigger the minimum charge, according to data from Credit Suisse. The minimum settlement fee has been in place for 22 years, way before high-speed traders came to dominate markets.

Any equity transaction of less than HK$100,000 ($12,900) in value incurs the minimum levy. The charge translates into trading costs of about 0.0076 percent of transaction value on average, or 0.76 basis points, according to Credit Suisse estimates.

That’s three times more than Tokyo Stock Exchange charges, and is double the fees in Australia’s largest stock-trading venue, ASX Ltd, according to the bank’s data. Relatively high fees have kept high-frequency trading firms, which are dominant liquidity providers on other markets around the world, mostly away from Hong Kong. Though some hate HFT firms, they have transformed other asset markets, and, according to many experts, helped lower trading costs.

Shalabi estimates that the Hong Kong exchange is the only major operator in Asia with the fixed-minimum cash settlement fee on the execution.

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