Good or bad? Commission-free stock trading by year-end?
If you have a habit of checking the business news every day, you will not have missed out this epic headline today. As a consumer, cheap and good is the way to go. If there is to be cheaper and better, without compromising the quality, then cheaper than cheap is the way to go.
Why are we even paying trading fees to get into the market? Can you imagine how great would that be to not care about breakeven prices after buying into certain shares? That said, why are we even paying such fees to the brokerage houses? In fact, why should we even be paying to enter the market at all?
In case you didn't know, stockbrokers have to pay trading fees too.
Is this a good thing for investors, traders and even speculators?
Certainly from the consumers' point of view, it is! How can that be not? Anyone who thinks otherwise is certainly out of their mind.
But is this the case?
I shall present you my 3 points with regards to this article:
1. First off, the brokerage fees are, in general, paid to settle the shares scripts that are purchased.
This includes the brokers who do the work to prepare and report the shares, assisting clients with payments and of course, guiding the client in the market. There will be backend operations staffs who help to generate the contra, purchase and sales statements, to receive local and overseas bank transfers, to settle foreign currencies and etc. Basically all the after purchase or sale operations.
The solution to allow commission-free trading would be to streamline the workflow and replace by automation, computer processes and other more robust and effective methods.
However, not all the transactional process can be replaced. Due to money laundering issues, there has to be human involvement in the processing to serve judgement and, not to mention, as a form of security too. This is especially so if the client was to transfer big amount (S$5m or so) over to settle the payments. On the other hand in this IT age, I strongly believe most clients will be savvy enough to settle any simple and straightforward online procedures. So long as it is not a large sum of money, it should be easy to fulfil the shares purchase.
Unfortunately, monetary settlements are not the only part of the shares transaction. The SG market does not just close at 5pm. From 5pm to 7pm, there are reporting and matching of trades to be done. To my best knowledge, settlement of shares has to be completed by 7pm. Furthermore, the matching of shares is only to be done from 5pm to 7pm. If matching is not completed, the counterparty will not be able complete the transaction too.
Then the tricky part is, what if some clients had oversold the shares? They will have to write SGX for this matter, to report and get pardoned. Failing to do so, there will be a penalty of S$1000.
Shares transactions have to be fulfilled on the same day, if not the market will be in great chaos and confusion the next day. Can anyone imagine that the Singtel shares that client has purchased resulted in a void trade because the counterparty did not have the shares to sell away in the first place?
But the question is, will clients do all of such? Will they be available from 5 to 7pm to complete the shares transactions in the day? Or will they just pay a small fee and get someone else to do it?
2. Do we need human brokers then?
Clients can place trades online with commission-free stock trading. Brokerage houses shall keep just the operations team to handle the post-market transactions.
From the other point of view, brokerage houses are incurring costs to keep the operations people to serve clients. Not to forget, there are stock analysts from research departments to provide stock coverage too. There have to be some forms of revenue coming from somewhere to offset all these costs. Which business will be willing and wanting to run a loss-making business? Totally good for the investors and traders but bad for brokerage houses.
Brokers will have a change of roles by then. No more serving of clients, no more of handling clients' transactional procedures. Will they be unemployed and be redundant?
Naturally brokerage houses will still be seeking some forms of revenue to offset the costs to support the clients who are now not paying anything for the trades done.
Guess what will happen next?
One, I foresee that brokerage houses will unleash the army of stockbrokers to trade on behalf of the company. There will be a profit sharing scheme between the house and brokers. Something similar to proprietary traders.
That means to say, brokers will be trading against clients. If the client is not sharp or experienced, a client will stand to lose more given that brokers have more tools at his disposal. There will be other market participants too, but the point being is that brokers have more time to trade.
Two, brokerage houses will become Bucket Shop Operators. Client's transaction goes "in the bucket" and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market at all. Alternatively, the bucket shop operator "literally 'plays the bank,' as in a gambling house, against the customer.
3. In the article, there is Chole.
It is an artificial intelligence system that gives investment advice. Yes, human brokers will then be redundant. Who needs a human to read and share technical tips and investing ideas when you have a rational and razor sharp intelligent system to effectively mark out the entry and exit prices of every stock? Isn't it perfect?
Yet, what if the system is overwhelmed by abnormalities? That is to say, the day volume on a particular stock has exceeded the average volume over many times. Simply based on numbers is not sufficient.
Or worse still, what if the system is rigged for some selfish and dark reasons?
Your comments?
Taken from: http://www.straitstimes.com/business/invest/commission-free-stock-trading-by-year-end
Investors here might soon be able to trade stocks using their phones and without needing to pay any commission.
Hong Kong-based firm 8 Securities is seeking regulatory approval and hopes to launch the service by the end of the year, co-founder and chief executive Mikaal Abdulla told The Straits Times.
The company also plans to roll out its "robot-adviser" service - an artificial intelligence system that gives investment advice.
The firm's platform is already being used in Japan and Hong Kong, where it allows users to trade over 15,000 United States, Hong Kong and China H-shares and exchange traded funds (ETFs) for free. Users do not need to maintain a minimum balance in accounts they open or pay account fees.
The trading platform was launched in 2012 and 8 Securities now holds over US$600 million (S$828 million) in customer assets.
Its robot-adviser service, launched in Hong Kong and Japan over a year ago, is named Chloe and helps investors set goals based on their age, annual income and risk profile.
Once the customer chooses his goal, he is shown a projection of when he can realistically achieve it based on low-, medium- and higher-risk investments in exchange- traded funds.
"Until now, 90 percent of the population is not able to access wealth management services because the entry price has traditionally been so high and the fees are significant," said Mr Abdulla.
"Robo-advisers solve this problem. They give everyone an opportunity to own a globally diversified portfolio that is rebalanced. Customers can enter and exit with no penalty."
Investors can monitor the performance of their portfolio at any time. "Financial advisers sleep while Chloe is always available," he added.
The company plans to set up an office in Singapore, said Mr Abdulla, who added that it has had several discussions with the Monetary Authority of Singapore (MAS) and is preparing its licensing application.
"Relative to other geographies, Singapore and the MAS are taking a very forward-looking view of fintech," he said.
Besides Singapore, 8 Securities is also exploring potential markets in Australia, Indonesia, the Middle East, India and the United States.
The firm has raked in US$25 million in funding since its founding in 2010 and is in the process of raising another US$20 million to power its regional expansion.
Mr Abdulla declined to reveal the company's sales figures but said turnover is expected to rise 300 or 400 percent over the next year.
The firm is generating revenue not just from its trading and robo-adviser services but also from interest income on customer's cash deposits and currency exchange.
The company expects to launch margin trading next year, he added.
Before starting 8 Securities, Mr Abdulla and co-founder Mathias Helleu managed online discount stock brokerage firm E*Trade across Asia, Europe, the Middle East, India and Canada.
Brokerages here said clients still see value in their strengths.
Ms Kwang Sook Fong, the head of marketing communications at Phillip Securities, said: "Throughout the years, there have been many new competitors and we welcome them to the industry. We do offer our clients free commission on a promotional basis but, ultimately, we believe in looking beyond just the rates."
The firm tailors its approach to clients based on their investment preferences - some are more self-directed while others require more personalised services, she said.
OCBC Securities managing director Raymond Chee said emerging financial technologies such as robo-advisers might "appeal to certain segments of investors, including those who are new to investing".
"We are open to exploring and adopting such new technologies where appropriate, to complement and broaden the range of services we offer to our customers," he said.
Correction note: This story has been updated to reflect the correct currency conversion. We are sorry for the error.
