Time to address retail brokers' concerns

Published September 14, 2011
By R SIVANITHY

THERE'S a strong sense of quiet resignation and resentment brewing within the ranks of retail brokers, negative emotions that stem from a growing belief that their days as market intermediaries are numbered with each new initiative announced by the Singapore Exchange (SGX).

From the controversial cancellation of the 12.30-2pm lunch break to enable full-day trading, to the introduction of a lightning-fast trading engine, retail trading representatives believe - not without some justification - that the cards are being increasingly stacked against them.

Take, for example, the buying-in of naked short-sold positions, where various penalties are possible, reaching $5,000 per day if the initial SGX buying-in proves unsuccessful. Remisiers argue with some justification that the only time these fines would reasonably apply would be during failed buying-in of illiquid penny stocks, which in turn implies that retail investors and their trading representatives could end up paying for what are usually inadvertent errors.

Many also point out the injustice of having to worry about large short-selling fines which wouldn't be needed in the first place if the current trading infrastructure
was similar to other developed markets like Hong Kong and Australia, where over-selling from one's central depository (CDP) account is not possible because of various safeguards embedded within the trading infrastructure.

In other words, if the local trading setup was more sophisticated and efficient (for instance, if brokers' trading platforms were linked to investors' CDP accounts) naked
short-selling, buying-in and punitive fines would not be necessary. Note also that having a cash market where securities can be delivered the next day would also do away with complicated buying-in procedures and short-selling fines. Yet, for some unknown reason, the exchange is reluctant to reintroduce this segment of the market.

Full-day trading is a particularly contentious subject which has already been extensively discussed in this column. Although there were strenuous objections from
brokers, the exchange pushed ahead with extended trading from Aug 1 on the grounds that an extra 90 minutes of trading should lead to improved volume.

That was the theory and although it's too early to draw definitive conclusions, the evidence so far is mixed - August's turnover did improve but this could have been
because of the large-scale volatility wrought by Europe's sovereign debt worries. Meanwhile, September's volume so far has dropped, sinking to levels experienced before full-day trading took effect.

Suffice it to say that the jury is still out on claims of a volume boost from extended trading, with many sceptical brokers pointing to Hong Kong, where the market still enjoys a 90-minute midday pause during which activity here also tapers off.

Yet another area of unhappiness is the perceived difference in treatment between a retail broker and one who employs a sophisticated computer programme. Here, the complaint revolves around what exactly constitutes a 'false market'. For example, if a retail broker were to rapidly enter and withdraw quotes, he or she inevitably draws a query from SGX's surveillance personnel and risks being accused of false market creation. Yet anecdotal evidence from many observers is that lightning-fast order entry and withdrawal is a common tactic employed by computerised trading and appears to be condoned by the exchange. Since the only way to beat a machine is probably to have a faster machine, one dealer remarked that 'nowadays, it's us against the machines and there can only be one winner'.

There's more, but it should be clear by now that festering anger and resentment among retail brokers who are key service personnel in what is essentially a service
industry cannot be a healthy state of affairs. These trading reps provide a vital link between thousands of retail investors and the stock market, so their welfare or concerns should not be taken lightly. If all parties concerned do not sit down to thrash out their differences and address these concerns, things can only get worse.