IN years gone by, being a stockbroker was satisfying, stimulating, exciting and sometimes even fascinating. More importantly, it was lucrative as stockbrokers were paid a handsome commission to execute transactions.

Those golden years are long gone. In the last 15 to 20 years, stock markets have experienced a revolution driven by the internet and, with online trading propelling trading volumes, the cost of intermediation has been drastically reduced. For stockbrokers, it appears the profession has gone downhill, plagued by low commissions in an environment where trading volume is insufficient to support such minimal service fees.

Technology has further disrupted the industry by taking large segments of full-service offerings and delivering them in digital form to millennials, who mostly live by the internet and prefer to trade online.

But it will be a while yet before these trades replace those of older, more traditional investors who prefer executing orders by phone, but who appear to have either found more attractive investment options or, because of disillusionment, have deserted the market. Hence, retail participation in the stock market has been absymal — a sad state of affairs that Bursa Malaysia and, stockbrokers in particular, are all too familiar with given that this situtation has existed for a number of years, if not decades.

Since the onset of the 1997/98 Asian financial crisis, investors have shied away from equities because they have not been able to make good returns — or worse, have suffered losses — in a mostly stagnant market.

What then, does the future hold for the country’s stockbrokers?

There are 30 participating organisations licensed by Securities Commission Malaysia (SC) to deal in securities on Bursa Malaysia (see table). Ten of them are backed by local banks, eight are owned by international investment banking groups, three are non-bank backed investment banks while the remaining nine are non-bank backed securities firms.

Rakuten Trade Sdn Bhd is the first and only completely online equity broker in the country. But word in the industry has it that at least two more licences for digital brokers will be issued by next year, if not this year.

At a time when bank backed investment banks (IBs) have expanded through mergers and acquisitions (M&A), the non-bank backed firms have been struggling to find earnings growth in recent years.

Moreover, foreign brokers have substantially supplanted local brokers — including major bank backed brokers — in handling the foreign institutional flows that local brokers once commanded. Local institutions even commit a portion of their institutional trades to foreign brokers.

Game of survival

Industry players approached by The Edge say there are three options for stockbrokers to move forward: (i) going digital; (ii) getting into joint ventures (JV); and (iii) going into M&A.

One merger currently underway is that of JF Apex Securities Bhd — a unit of locally listed Apex Equity Holdings Bhd — with Mercury Securities Sdn Bhd. JF Apex and Mercury Securities are two of the few remaining non-bank backed stockbroking firms in the country. Their proposed merger is expected to enhance operational efficiency and productivity by combining operations, including systems integration and distribution channels.

Early this month, CGS-CIMB Securities Sdn Bhd officially commenced operations. A JV between CIMB Group Holdings Bhd and China Galaxy International Financial Holdings Ltd, a wholly-owned subsidiary of China Galaxy Securities Co Ltd, each owns a 50% stake in the entity, whose stockbroking business comprises institutional and retail brokerage, share margin financing for broking clients, equity financing services and equities research as well as exchange listed derivative broking.

According to Maybank Kim Eng regional head of brokerage Jeffrey Goh, margin compression reduces the ability of smaller brokers to compete as they typically depend on an agency distribution model. “They are left with limited resources to invest in research, systems and talent. Just as the Malaysian stockbroking industry missed out on the big tech boom, the industry may risk missing out on the new mega trends of artificial intelligence and Industry 4.0.”

He says the survivors will be those who learn the quickest that the golden years of stockbroking are behind them and that their reinvention is now more urgent than ever. “It seems contradictory to say that we must cut operating costs and, at the same time, offer better services to clients. Simply put, we must find new models for delivering those services and still be relevant.”

Goh adds that many brokers may use cost control measures to prolong their survival, but this may ultimately reduce their ability to provide effective service. “The term ‘stockbroker’ these days seems to reflect an era that is rapidly disappearing in our rear view mirror. It is important for our industry to preserve the core functions of our successful market amid falling fees and incomes. The stock market is a platform for wealth creation and a mechanism for supporting homegrown entrepreneurs and for supporting the economy.”

PM Securities Sdn Bhd CEO Andrew Yaw Mun Keng is a strong advocate of industry consolidation, especially M&A between non-bank backed entities. But he acknowledges that ultimately, M&A boils down to two main factors: pricing and who has control of the enlarged entity. “The cost of running a stockbroking firm is high and it is not easy for us to bring it down further. Unless we do cost sharing arrangements. I believe PM Securities is indeed open for M&A activities, but the value proposition must make sense to our shareholders.”

To find a competitive edge, he reiterates that stockbroking firms should take the opportunity to re-engineer themselves by engaging or teaming up with other players via strategic alliances or revenue and cost sharing models. “Local brokers can remain competitive by having [offering] specialised corporate access, a localised approach and specific tailor-made requirements. We need market depth and sustainable volumes. PM Securities has a small competitive edge in terms of its traditional followers and its faithful set of retail clients.”

Controlled by Tan Sri Khoo Kay Peng’s Pan Malaysia Holdings Bhd, PM Securities is the last universal broker in the country.

Go digital or go bust

Not surprisingly, Rakuten Trade managing director Kaoru Arai believes that digital stockbroking is the way forward. Presently, he says, digital and traditional brokers have separate markets that they cater for. But in order to meet the changing expectations of investors and to spur greater interest in investing, digitalisation cannot be ignored.

“Traditional brokers are physically present, hence, they enable high-touch engagements, whereas digital brokers could provide an end-to-end process completely online. Digital stockbroking can be a quick and easy way for more digital-savvy retail investors to manage and control their equity investment activities,” Arai says.

Rakuten Trade is a joint venture between Kenanga Investment Bank Bhd and Rakuten Securities Inc, one of the largest online brokers in Japan.

In line with the current shift towards digitisation, Arai observes that technology can help alleviate concerns of margin compression and operational costs. For example, Rakuten Securities in Japan services more than 3.2 million clients with a staff strength of only 420 people.

“Local brokers need to adapt to the fast-changing stockbroking landscape that has embraced digitalisation, and recognise its impact on market advancement,” he says.

TA Investment Management Bhd CEO Wong Mien says technology can help with cost cutting and achieving higher efficiency to alleviate some of the pressure of falling commission rates and higher compliance expenses. “Digital broking will be the future and investors will prefer to go online and enjoy lower brokerage fees. If traditional stockbroking firms do not go into digital broking, they will likely be phased out in the future.”

Wong says most local brokers have JVs with foreign brokers to allow the trading of foreign securities. Therefore, it is important for local brokers to offer this service as investors are more sophisticated and more willing to invest in overseas markets.

As the industry becomes more competitive, he says non-bank backed brokers are likely to see further consolidation to size up to compete with larger rivals. “Local brokers are able to offer more personalised services to their clients because they have more headcount in terms of sales and research personnel. While analysts from foreign-based brokers tend to focus on big-cap stocks, local brokers can move away to cover more mid and small-cap stocks that are under the radar.”

Hong Leong Investment Bank Bhd dealer representative Frank Lin suggests that local brokers offer trading platforms that trade foreign market stocks to increase their earnings base. “Since foreign players are coming into our market, we have to be in a position to expand our scope to cover stocks in more markets to remain competitive.”

Given that the local landscape for brokers remains tough because of the high number of players, Lin expects more M&A until a new equilibrium is reached. “Yes, I do anticipate further consolidation among the non-bank backed brokers, the reason being they are small and lack the capacity or resources to attract sizable M&A, IPOs and underwritings.”

He observes that most local stockbroking firms have already introduced a digital platform and, therefore, have the capacity to cater for players who prefer to trade online or in the more traditional way.

Is the grass greener in corporate finance?

Mercury Securities Sdn Bhd, TA Securities Holdings Bhd and M&A Securities Sdn Bhd are probably the most unique securities firms in Malaysia. Among the 15 principal advisers licensed to undertake full corporate finance advisory by the SC, only these three are non-bank backed and non-investment bank backed.

Moreover, among the nine remaining non-bank-backed stockbroking firms, only these three can take a central role as adviser or sponsor in a flotation exercise.

Interestingly, last year Mercury Securities and M&A Securities reported a higher return on equity (ROE) than most of their non-bank backed peers, including Malacca Securities Sdn Bhd and Kenanga Investment Bank Bhd.

Notably, Mercury Securities — whose corporate finance team was ranked by Bloomberg first in merger and acquisition deal counts for three consecutive years (2016 to 2018) — saw its ROE climb from 5.48% in 2016 to 7.22% in 2017, rising further to 7.89% in 2018.

In contrast, its merger target, Apex Equity Holdings Bhd, which focuses mainly on trading activities, saw its ROE decline to 2.73% last year, from 4.84% in 2017 and 3.67% in 2016.

So, does corporate finance offer better prospects than securities, clearings and derivatives dealing?

Given the continuous pressure to reduce brokerage rates, increasing operating and compliance costs and intense competition, the Association of Stockbroking Companies Malaysia (ASCM) acknowledges that non-bank backed brokers need to lessen their reliance on traditional brokerage income and expand their fee-based income in order to remain in business.

But there is a major obstacle to this, and that is in the scarcity of qualified professionals in corporate finance, as many talented professionals have been lured away by big international firms offering better compensation.

An ASCM spokesman tells The Edge that similar to bank backed principal advisers, the non-bank backed firms licensed by the SC can also undertake corporate finance advisory work. However, the non-bank backed firms who do not have at least two Qualified Senior Personnel (QSP) are not permitted to undertake three specific types of corporate finance advisory work — initial public offering (IPO) of companies to be listed on the Main and ACE Markets; transfers to the Main Market; and corporate exercises involving a significant change of business activities.

The spokesman says the scarcity and and high cost of maintaining QSPs led to non-bank backed firms who do not have the required QSPs being unable to expand the scope of their services to include the three specific types of corporate finance work, even though they have the expertise. “We are of the view that the SC should liberalise the requirement for QSPs to enable smaller outfits to participate as advisers for all types of corporate exercises.”

A veteran stockbroker who prefers to remain anonymous concurs, saying, “The SC has very clear rules on how a broker can apply for a full corporate finance advisory licence. Every broker now has the ability to apply for such a licence. But corporate finance on its own, without a dealing in securities and derivatives capability, is not an end-all. A broking firm has to provide a full suite of services to stay competitive and add value to the marketplace.”