OCBC Securities, trade reps moving up value chain

Singapore

WITH commissions for equity trades facing further cuts and interest in foreign equity markets on the rise, not only must stock brokers and remisiers move up the value chain, brokerages too must look beyond commissions and generate other income streams, said Dennis Hong, managing director of OCBC Securities Private Limited (OSPL).

In his first media interview since assuming his role on May 1 last year, Mr Hong shared how the OCBC Bank-backed brokerage has been evolving in an industry staggering under the weight of a new Know-Your-Client regime, lacklustre market for initial public offerings and already razor-thin commissions from online share trading.

"At the firm level, the era of declining brokerage commission is here. We see it in the market, our competitors, in fintech companies coming in offering no transactional charges for trades. My contention is that there are simply different revenue models," said the Public Service Commission (Local Merit) scholar, who began his career in the Singapore Police Force, before joining OCBC Bank in 2010.

OSPL has a diversified business model, straddling three main segments of retail equities, institutional equities, as well as futures and leveraged foreign exchange (FX).

"This has buffered the downward pressure. Our equities business remains resilient, with total equities traded value increasing by a 4 per cent compound annual growth rate (CAGR) over the past three years," he said.

"This is supported by our re-orientation of focus to facilitate access to over 30 foreign markets and exchanges that allowed us to register a CAGR of 24 per cent in foreign retail traded value within the same period. Concurrently, our futures and leveraged FX business has steadily increased its contribution and now represents more than one-fifth of our top-line in 2018," Mr Hong shared.

For 2018, OSPL's traded value for overseas market that went through its retail channels increased by 24 per cent year-on-year. At the same time, its remisiers increased their non-SGX traded value by 45 per cent year-on-year. (see amendment note)

Trading representatives (TRs), including remisiers, continue to play an important role in the business.

Asked if OSPL is mulling a path where the bank-backed brokerage gets assimilated back into the bank, Mr Hong replied: "My position is I will not go down that path."

He explained: "We capture the best of both worlds. Revenue synergies, cost efficiencies, and the removal of structural silos have been achieved through close collaboration with OCBC Group entities.

"Meanwhile, we embrace the TR community to deliver one-third of all new customer originations in OCBC Securities. The TRs' efforts have the incremental benefit of broadening our franchise penetration. With the full array of tools availed to the TRs, their productivity, measured by total equities traded value per TR, has also grown by a CAGR of 8 per cent over the past three years."

He added that remisiers contribute a "significant portion" of OSPL's new customer originations.

As commission income shrinks, both retail brokers and remisiers have to move up the value chain.

"For retail brokers, this has meant developing different revenue models that are in sync with customers' expectations," Mr Hong said.

For instance, where customers desire the immediate gratification of avoiding transactional brokerage commissions, subsequent fees may be payable in the form of periodic charges like asset-under-management fees, platform subscription fees and custody fees. Otherwise, there may be prescription for minimum cash balances which in turn deliver float income for brokers.

"On our part, we are conducting reviews as to customers' preferred pricing mechanism," Mr Hong said.

Brokers can also deliver value-added services like share margin financing, share lending which helps customers to monetise their assets, and in facilitating bulk share placements among parties.

For OSPL, revenue derived from extending such value-added services grew by 15 per cent year-on-year in 2018.

Over the years, the house also noted a gravitation of retail customers to two ends of a spectrum - one desiring a simple, efficient trading platform that charges low fees and the other a concierge service involving personal service.

"While brokers can invest in technology build to deliver the former, the latter remains where TRs remain relevant and impactful," Mr Hong reckoned. "The evolution should be where the mature trading representatives become more focused in concierge or high touch segment."

To facilitate this, TRs including remisiers, are given access to a full catalogue of products to offer clients.

"At OCBC Securities, remisiers are able to tap on the wider OCBC Group's wealth franchise, products and capabilities, with mutual rewards and recognition, to serve the high-touch customers," Mr Hong said. "We let them have the tools, mindset, directions on how to stay relevant in the future."

The house has regular seminars and research materials distributed to help remisiers expand their market knowledge beyond Singapore. It also has a formal ecosystem where foreign market specialists are stationed at night trading desks to support customers trading during overnight hours.

These measures have shown results with remisiers' average equities turnover for foreign market trades growing by 45 per cent year-on-year in 2018, and foreign market brokerage commissions now accounting for more than 30 per cent of total brokerage commission.

OSPL has not made any attempt to force its 200-odd remisiers into private banking.

Mr Hong said OSPL intends to "continue to invest and recruit new TRs to our family and more than 20 TRs have joined us over the past three years".

Amendment note: It was stated that OSPL's remisiers increased their SGX traded value by 45 per cent year-on-year. It should be in fact be their non-SGX traded value. The article has been amended to reflect this.