Vital to make retail broking more appealing

Business Times - 23 May 2011

By R SIVANITHY

WITH commissions constantly under pressure, dealers and remisiers are probably not overstating things when they say theirs is a sunset profession, one whose attraction wanes with each turn of the regulatory screw.

Earlier this year, they had to deal with news that trading in the local stock market would soon be full-day, that is, no more 90-minute lunch break. Then came the release of new, significantly heftier fines for dealers who fail to observe proper procedures in administrative tasks such as keeping proper records.

If frontline dealing becomes increasingly unappetising, more remisiers are likely to throw in the towel, while fewer join. And, herein lies the problem: Retail investors, many of whom rely on their remisiers for advice and expertise, will over time surely suffer from poorer service.

If so, how is the Singapore Exchange (SGX) to lure retail players back into the market, given anecdotal evidence that many are already disillusioned with the local market and the investments it offers?

Some observers might not see this as being significant, since it is institutions via their high-speed programmes that are thought best positioned to generate the vast amounts of liquidity that exchanges crave. Certainly, SGX appears to be focusing most of its efforts in this direction with its recent $250 million investment in the world's fastest-trading engine to cater to the needs of high-speed traders.

However, the experience of the local equity market is that the contribution of retail investors should not be underestimated. Attempts over the past 20 years to launch an options market, single-stock futures and extended settlement contracts all fell victim to gradually disappearing liquidity and, in some cases, eventual complete failure because retail investors were not properly engaged.

The lesson is that small investors, by virtue of their considerable collective financial muscle, form a significant presence in the local market, and steps should be taken to ensure their participation is as active as possible.

And the best way to do this would be to take a serious look at the issues confronting remisiers and dealers, since these are the people who, for many retail investors, are the face of the local stock market.

Firstly and most importantly, there is an urgent need to address the perception that being a remisier is a thankless job with plenty of downside and little upside. The main reason for this has been highlighted before in this column, namely the lopsided risk-reward structure that remisiers have to work with, which places all the risk on their shoulders in return for only a portion of the reward.

As it stands today, dealing representatives have to act as credit officers on behalf of the management of the firms at which they work; yet many - possibly all - are not equipped to monitor the creditworthiness of their customers, having no access to or knowledge of the latter's income, debts and spending habits.

Worse, a remisier at one firm is completely ignorant of the number of accounts a customer may have with other firms, as well as the number of positions that a customer may have open at any one time. It is difficult to see how dealing representatives can properly discharge their role as fiduciaries when they have to labour under such an inequitable system.

As for the thorny issue of a lunch break, the middle ground proposed some months ago in this column is still worth considering if SGX is prepared to accept a 60-minute extension to trading hours instead of 90. This can be achieved if the market was to open at 8.30am instead of 9am (that is, 30 minutes earlier) and the current lunch break changed to 1-2pm instead of the present 12.30-2pm. Surely, a more conciliatory stance on SGX's part would be welcome, instead of unilateral action that has upset those affected.

What is needed is for all interested parties, namely the Society of Remisiers, SGX, broking firm managements and even the Monetary Authority of Singapore, to sit down and work out ways of addressing the issues confronting the profession. If not, there is a very real danger that the appeal of retail broking will continue to decline - and take with it the participation of the retail investor.

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