Brokers could deploy technology as one way of changing their fortunes, which have been dwindling especially with foreigners dominating local trading. FILE PHOTO | NMG
The future is not looking rosy for intermediaries going by data in their results reported last week.
Call it the great paradox, or the season of darkness: As shares crawl to new highs and investor sentiment remains strong, brokerages are singing a different song. A quick peek at their reported results last month shows discouraging data particularly for local brokerages. Most are hanging on a string.
Lack of foreign trading desks has shrunk their market share over the past few years. In the old days, they had about 63 per cent of the trading business. By 2016, that had fallen to less than 35 per cent.
This new reality represents the biggest existential threat to the local brokerages. Equally concerning is the lack of a proper response to this threat.
But how did we get here? Several things. But one packs the most punch. The 2008 financial crisis, where a number of local firms went out of business before being bought out, earned them a black eye.
Investors rightly wondered about the credibility of businesses that failed at managing their own finances—to date, some of these legacy issues remain unresolved.
Around this time, a new breed of brokers entered the game and changed it. Since then, the fight for a piece of the Sh3.4 billion brokerage pie has shifted.
Foreign trading desks are the new centres of power and foreign investors have become the new most valuable players. This group now controls a huge percentage of annual equity turnover. Their monthly trading participation averages north of 50 per cent. Last year, this metric stood at 64 per cent.
As the landscape has changed, local brokers have faced slowing businesses. Margins have gone red. Employee head count has declined.
Scramble for the not-so-lucrative retail brokerage space has meant traders getting paid less. “Public offers” business line has also become unreliable; last initial public offers (IPO) happened in 2015 and only attracted 28 per cent subscription. Last rights issue was in 2016 and only attracted 92 per cent subscription.
Note the dwindling subscription levels: 10-year average subscription levels is 176 per cent (rights issue) and 395 per cent (for initial offerings). Advisory business too has become very competitive and the gap between now and the next deal has widened. Is their hope for the local broker? Yes.
Now, a quick dose of reality. Not everyone can bag the local institutional business. Pursuing this path would push commissions in a “race to the bottom” between rival brokers. In my view, a more crucial consideration is re-engagement with retail investors.
This is the lowest hanging fruit. Retail investors account for 80 per cent of shares held in the equity market but control less than 30 per cent in monthly turnover (foreign investors only control 20 per cent of investor holdings).
Perhaps the most significant factor here is technology. Brokers could deploy the modern tools that the field of financial technology – colloquially known as Fintech – to facilitate this group of investors engage the market in a new way. This should also keep expenses low.
To close, allow me to end today’s column with a mea culpa: I have long thought that the industry needed more stock brokers.
This is something I now realise should wait. Perhaps we need few but strong players.
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Note: The results are not exact but very close to the actual.
