Hong Kong-Shanghai Stock Market Link May Squeeze Local Brokers

Hong Kong’s small stock brokerages may shrink as a market access link with Shanghai increases costs and intensifies competition with Chinese firms, according to securities groups.

Fees in Hong Kong may fall to match those charged in China as the market access link enables Chinese clients to buy stocks in the city directly, said Jeffrey Chan, chairman of the Hong Kong Securities Association. Commissions may fall to as low as 0.03 percent, he said.

China’s plan to connect the two stock exchanges as early as October is spurring interest from about 100 brokerages in Hong Kong looking to provide unprecedented access to the biggest emerging market. While the link is expected to bolster trading volume, the costs of taking part may be too high for small firms, said Christopher Cheung, a Hong Kong lawmaker representing the financial service industry.

“You have to buy extra trading computers to join the connect, and the commission is very low,” said Cheung, who estimates that a small firm may need to spend as much as HK$300,000 ($38,700) to apply and upgrade its systems. “Many brokers are waiting to see if they should quit their jobs in one-and-a half years.”

With many local brokerages unable to afford the upgrade, they may make up less than 10 percent of trading participants for the link, said David Wong, honorary president of the Hong Kong Securities & Futures Professionals Association. Commissions in the city currently range from 0.05 percent to 0.18 percent, according to the group.

Chinese Competition

“We can’t lower commission anymore,” said Wong. “This vicious competition will make local brokers die out.”

The exchange link will allow a combined 23.5 billion yuan ($3.8 billion) of daily cross-border trading. It may bolster trading volume in Hong Kong, where the daily average turnover on the exchange has dropped 7.9 percent to HK$62.9 billion in the six months ended June from a year ago.

The turnover decline in Hong Kong has come as competition from Chinese banks and securities firms increases. Membership of the Chinese Securities Association of Hong Kong, comprising mainly China-backed companies, rose to more than 75 this year from 19 when it was founded in October 2009, according to its website.

Small brokers in Hong Kong accounted for 11.6 percent of transactions on the exchange in July, according to data from the bourse operator, which has 500 trading members. The biggest 65 members accounted for 88.4 percent of the transactions.

Some local brokerages may seek to access the market link through the trading platforms of Chinese firms to lower costs.

Haitong International Securities Group Ltd. (665), a unit of China’s second-largest brokerage, said Aug. 13 that it will offer the usage of its trading platform for the link to rivals for free for three months. About 10 Hong Kong securities companies have expressed interest, Haitong Executive Director Wilson Hui said.

“We are a small company, we don’t have the business to justify the expenses,” said Francis Lun, the Hong Kong-based chief executive officer of Geo Securities Ltd. “We are going to trade through” Chinese state-owned companies, he said.

To contact the reporter on this story: Jill Mao in Hong Kong at mmao14@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net Nicholas Wadhams

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