Fixed trading costs such as stamp duty and other taxes are notoriously high in Asia ex-Japan, and many are not optimistic about the prospect of them coming down.
That is the view of both Nicola Nicoletti*, head of investment strategy and risk at Hong Kong asset manager Enhanced Investment Products (EIP), and Ofir Gefen, head of Asia-Pacific research and liquidity management at agency broker ITG.
“I don’t think costs have come down in the past few years. Stamp duties are still very high, apart from in Japan, which is pretty much a frictionless market,” says Nicoletti, who has worked for quantitative trading firms and is well versed in transaction cost issues in Asia.
“It’s actually cheaper for retail customers to trade in Europe than it is for institutions to trade here,” he adds. “Bid-ask spreads are still relatively wide and commission rates are not that low. The lion’s share is eaten up by the exchanges.”
For example, he notes that Hong Kong Exchanges and Clearing is responsible for at least two-thirds of the fixed cost of a trade in the territory, contributing to a 75% net profit margin for the bourse. “I don’t know any other company in the world with that sort of profit margin,” he says. “Apple is not even close.”
Singapore Exchange (SGX) is no slouch either, with a 44% profit margin, he notes.
“All this tells you that the hottest exchange can charge more because everyone wants to list there,” says Nicoletti. HKEx has been top globally in terms of IPO volume for the three years from 2009 to 2011.
Competition might help the situation, but exchanges are effectively a protected industry, particularly in Asia. Hence doing cross-border mergers is very difficult, says Nicoletti – as has been shown by the failure of several M&A deals in recent years, including that between ASX in Sydney and SGX.
One possibility might be if China were to open up further so that the Shanghai Stock Exchange were to become an alternative to Hong Kong for both listing and trading, he says, “but obviously that’s not going to happen soon”.
Others agree fixed trading costs are unlikely to come down in the foreseeable future in Hong Kong or Singapore.
“There has to be some incentive – change has to come from somewhere when it comes to issues like taxes, which are controlled by the government,” says ITG's Gefen. “Though one trigger may be investors wanting to see better investment conditions.”
That is why ITG focuses on seeking to reduce non-fixed trading costs, he notes – that is, those caused by market impact or delays in execution. For a traditional long-only fund, the latter types of costs typically account for 80% of transaction costs in Hong Kong, with taxes and fees like stamp duty only making up around 20% of overall trading costs.
And market-impact – or implementation-shortfall – costs have indeed fallen since the global financial crisis, according to ITG (see graph).
At the exchange level, there have been examples of fee reductions when competition has been enabled. In Australia, for example, ASX cut trading fees before alternative trading venue Chi-X went live last year.
“But the situation may be slightly different in Hong Kong, where most people’s concerns are about stamp duty,” says Gefen.
*More from an interview with Nicoletti appears in the latest (May) issue of AsianInvestor magazine, including details of EIP's trading desk set-up.