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Share traders calling it a day as market volume dries up
KISHORE Rochey was a trading representative for 20 years before calling it quits in September this year. He said that the average net commission earned by his peers has been on the decline, with through-the-grapevine estimates falling from around S$6,000 to S$8,000 a decade ago to about S$1,000 when he left.
"It made no sense to stay around."
Mr Rochey's story is not unique. Market liquidity in Singapore is at a multi-year low, commissions are suffering and many in the industry are either looking for other sources of income or simply moving on.
While many in the industry acknowledge macroeconomic effects in the market, they also blame regulations that have raised the costs for speculative traders and cut spreads and commissions for trading representatives.
In response, Singapore Exchange (SGX) stressed that it cannot jeopardise long-term market quality for short-term liquidity droughts, and noted that it has taken several initiatives aimed at helping the industry.
The numbers do not paint a pretty picture. Market turnover fell 21 per cent in the financial year ended June 30, 2014, to S$286 billion, according to SGX. That is the lowest turnover since fiscal 2006, when the size of the total market was less than what it is worth today.
Looking at turnover as a proportion of market capitalisation, the average turnover velocity in FY2014 was just 40 per cent, compared to 71 per cent back in FY2007 (view infographic).
UOB-Kay Hian Holdings posted a 31.8 per cent decrease in first-half commission income this year, to S$113 million. DBS Group Holdings' brokerage income for the first half of 2014 fell 29 per cent to S$85 million. OCBC Bank matched DBS's decline, with brokerage income dropping to S$26 million.
An executive at a brokerage who deals with remisiers said that the number of trading representatives in Singapore has fallen to about 3,900 in 2013 from more than 4,300 in 2011.
Jimmy Ho, president of the Society of Remisiers of Singapore, remarked: "I quote one remisier who's been in the industry for over 40 years, and he said it's never been like this before."
Those who are still in the game are looking for other ways to make a buck.
Mr Rochey noted that some brokerages are encouraging their remisiers to help refer their clients to specialists of other products and asset classes such as contracts for difference and forex.
"But at the end of the day, when the commissions are so low . . . there's just not enough meat," Mr Rochey said.
A trader who has since moved to another part of the desk said that investors are also looking to overseas markets for more action. Emerging markets such as Thailand, for example, offer more inefficiencies that investors are better able to capture, he said.
"You have to look to where the money is," the trader said. "Thailand, Hong Kong, Indonesia, even the US, where the volatility is there. If you're talking about money flow, in South-east Asia, you don't have to look that far beyond Thailand and Indonesia."
Industry veterans cited a number of factors for the industry's current woes. The first, and most obvious, is that equity trading volumes across the world have not been great ever since the Global Financial Crisis.
"From 2009 until now, the market has gone out, so people don't have the courage to come in big time," Mr Rochey said. "You need a whole new breed of investors to come in and create the volume, who didn't experience the pain of 2008 and 2009. That will take a decade."
Singapore has been hit especially hard because of the penny stock collapse that began in October 2013 and continues to weigh on small and mid-cap counters.
But the industry said that regulations, some of which were in response to the penny meltdown, have made it hard for the market to recover from that hit.
The trading executive said that SGX's removal of its S$600 clearing-fee cap in June has crimped large-volume day trades.
"Now the clearing fee has no cap, so it's very expensive for them to trade," the executive said. "Low liquidity and volumes mean it's also hard for them to trade more, and the bid-ask size is smaller now, so for them to make money from day trading is very hard."
Mr Ho said that proposed rule changes such as the shortening of the settlement period to two days from three days and the requirement for brokerages to collect collateral will suppress the liquidity provided by contra trading. Contra trading refers to the practice of taking and unwinding positions without collateral within the settlement period.
"If you ask for margin, that's operating like a bank," Mr Ho said. "Any exchange doesn't operate this way, because any exchange must combine the speculative and fundamental elements. If you take out the speculative element, the market won't function."
But SGX is adamant that some of those rules being complained about actually improve market quality, and changing them to address what it views as a short-term liquidity downturn would be myopic.
"Yes, from an exchange perspective and from my perspective, I'd like to have higher turnover," chief executive Magnus Bocker said. "But the question is, I'm here to long-term service the investors, I'm here to protect the retail investors and the institutional investors, I'm here to protect the integrity of the market, I'm here to support that we can raise money for companies."
Mr Bocker also argued that although liquidity is thin at the moment, other aspects of the market, such as ease of capital raising for issuers and the costs for investors are still robust. Programmes that incentivise market makers and liquidity providers are also showing early success.
"If you go back and say it's not so good, I would say the three important functions of the equity market work well," Mr Bocker said.
Mr Rochey, who said that he now makes more as a private investor, felt that brokerages should also be more aggressive in incentivising volumes. Graduated takes of commissions, where a remisier's share of commissions is stepped up if the remisier's volume crosses a threshold, should be utilised more, he said.
"If the broking houses want to revive the industry . . . share more of the profit."
The trader said that the market situation is unlikely to improve for the rest of the year. "In two weeks' time, we're into the month of November, and for the European and US funds, this is fund closure time for them . . . The market will get quieter."*