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Not all Share and Share Alike
Hong Kong investors are avoiding the Net. Trading fees are partly to blame

Getting an IPOverhaul:
The Asiaweek/CNN Internet Index expands to 40 companies, while the Asian tech stock skid continues

Hong Kong construction manager William Siu spends a few hours each night buying and selling Hong Kong and U.S. shares over the Internet, sometimes trading up to $22,000 in one session. But don't assume that Siu is a big fan of electronic trading.

"There's no advantage to online trading in Hong Kong right now," says Siu. "Online, it takes some time to execute your orders, whereas you can get confirmation right away from your traditional broker." Plus, he says, e-trading does nothing for his wallet. In Hong Kong, the stock exchange sets a minimum commission of 0.25%, meaning e-trades cost the same as traditional ones. In practice, Internet brokerage houses in Hong Kong charge either the 0.25% rate or, on small trades, a minimum commission of about $12.

"There should be cost savings that are passed on to the consumers," complains Siu, and it is evident that thousands of other small investors feel the same way. In countries such as South Korea and the U.S., the advent of low-cost, flat-rate Internet trading has created booming e-trading activity. But in Hong Kong, of the $23 billion in securities traded locally in April, an insignificant 1.3% were bought and sold over the Net, according to the Securities and Futures Commission (SFC). In comparison, South Korea has seen online trading take off in the past two years, soaring to 57% of total turnover in May and setting the record for the highest percentage of Web-based trading in the world. Some 92% of Korean retail investors say they prefer buying and selling over the Internet to using traditional brokerages.

The disparity makes little sense considering that the SAR's estimated Internet penetration rate this year is only slightly less than that of Korea — 22% versus 25%, according to Morgan Stanley Dean Witter. But Hong Kong's poor appetite can be traced to a number of obstacles, including the slow introduction of electronic trading technology, a rigid commission system — perhaps even cultural differences. Until recently, investors in Hong Kong have had few online options. Only a handful of firms have been offering e-trading for more than a few months, among them Celestial Asia Securities and Boom Securities. While that number rose to 26 in April, four firms still account for 83% of electronic trading volume.

One important reason why so few brokers set up cyber-trading subsidiaries is the absence of automatic, electronic trade execution. Under Hong Kong's current system, brokers must key in trading requests manually before forwarding them to the stock exchange. In effect, there's no difference whether a "buy" or "sell" order is received by fax, phone or through the Net. All must pass through human hands.

By the end of the year, Hong Kong plans to replace that outmoded and inefficient system with a network called AMS/3, which allows investors' orders to go straight to the exchange. The switchover is expected to boost volume at online firms from 5% to 40%, according to the SFC.

But even after the deployment of high-tech trading, there is some doubt whether Hong Kong will see online trading increase until investors get a cheaper deal. And that means lower commissions. SAR trading commissions aren't excessive in comparison with other countries in the region, but brokers recognize that reducing the current floor will stimulate both price competition and retail activity. "Lack of deregulation has slowed progress, as there is little incentive for discount brokerage," says Matt McGarvey, a Hong Kong-based analyst at IDC Asia Pacific. And discount brokers such as Charles Schwab & Co. "are one of the key drivers of the online stock-trading revolution in the States."

South Korea has followed a pattern similar to the U.S., where the introduction of cut-rate Internet brokers sparked a frenzy in day trading. After Korean commissions were deregulated, they fell quickly from an average of 0.5% to 0.1%. Some firms, such as E*TRADE Korea, now charge a razor-thin commission of only 0.03%. "One of the major reasons why Korea is picking up so fast is the price differentiation between conventional brokerage and online trading," says Felix Chan, head of KGI Asia's e-broking service in Hong Kong. Chan's office in May demonstrated that the same price/demand laws apply to Hong Kong with a limited promotion offering zero-commission trading through to the end of the year. The special offer garnered some 5,000 new clients, about 70% of KGI's total business. Boom followed suit with a one-day-only zero-commission deal for new customers. Since neither Boom nor KGI Asia are members of the stock exchange, they could eliminate commissions without running afoul of securities regulations. But their investors aren't covered by an exchange-backed insurance fund that reimburses losses incurred due to bankruptcy or fraud by a brokerage house.

Hong Kong's practice of setting a minimum on commissions and fees is out of step with the rest of the world. Only two of the 15 largest stock markets globally — Hong Kong and Taiwan — set a commission floor, according to an SFC study. That is changing. Earlier this year, Hong Kong's powerful financial secretary Donald Tsang announced a cut in the stamp duty on stock trades and said brokerage commissions needed to fall. Soon after, the stock exchange agreed to remove the minimum commission, but not until April 2002, to give local brokers time to adjust.

Some argue that the timetable should be speeded up if Hong Kong is to keep pace with the global financial community. For the moment, though, local brokers appear content to stand pat — thus deferring a competitive battle that could hurt profit margins and ultimately put some of them out of business.

Chan predicts that, once the floor is eliminated, commissions will drop by half immediately. But it remains to be seen if Hong Kongers will flock online in numbers. Managing investments online, without a professional advisor, has a "do-it-yourself" aspect to it that many small investors find unsettling and time-consuming. Although financial information on Asian companies is becoming more available online, Hong Kong punters prefer getting their stock tips though a broker, someone with whom they have a personal relationship, says Chan.

If the track record of the U.S. and South Korea is any guide, however, cultural reservations will be swept aside by cost considerations. IDC projects online trading volumes in Hong Kong will reach 40% of all trades by 2003. Others are even more confident that SAR investors will catch up, and fast. "We think the Hong Kong market is going to exceed Korea in terms of adoption of online trading," says Boom Securities chief executive Mark Duff, "when the commission goes." As usual, patience will have its rewards.

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