Asian Brokerage in Transformation

In a  world of globalised investments, how are Asia's broker-dealers managing their global expansions?

Hong Kong investors: what, where and when?

Hong Kongers have been investing in a wide range of complex investment instruments, across many markets for decades. Today, North American markets are at the centre of their global outlook (with 56% of investors focused there), narrowly eclipsing Asian markets (at 54%) and relegating other markets in Europe, Africa and Latin America to niche roles. This regional allocation looks set to continue, with growth in America-bound investments set to outpace those into other regions – making US Equities the single mainstay of the Hong Kong investor’s portfolio outside of Hong Kong.

Yet whilst the market-mix looks stable, the asset allocations of Hong Kong investors is anything but that. In the face of challenging economic conditions in Hong Kong and the growing need to diversify, the typical Hong Kong investor’s portfolio is broadening rapidly into a range of new assets including fixed income (expanding at 15% year on year), futures and options (13%), currencies (13%), private equity (11%) and mutual funds (10%). The typical Hong Kong investor is evolving from Hong Kong stock picking to running a globally balanced portfolio that includes risk management tools and well-diversified exposures.

This expansion is not happening gradually. Hong Kong investors are making this transition right now (52% of investors are doing this in 2020) and so the urgent challenge

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How likely are Asian Brokers to use their existing systems to support their future growth

Five years ago, most Hong Kong brokers were running back offices that relied heavily on cheques, faxed instructions and manual trade data entry. Today, these same brokerages now seek to offer margin financing on US-stocks 24-hours-a-day, for example, alongside 20 other global markets. As they navigate through a mixture of opportunities and existential threats, the common theme for brokers is the significant burden these changes are putting on their technology infrastructures.

Yet only around 40% of Hong Kong brokers plan to use their existing technology platforms to support their near-term growth plans. Those running home-build platforms and those serving retail clients are even less confident – highlighting the need for a generational shift in front and back office systems amongst Hong Kong’s brokers.

Change means transformation – and it appears that most brokers’ systems aren’t ready to scale.

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What are Hong Kong investors looking for in a broker?

And so how to react? Unlike their US-peers, Hong Kong brokers have no ability to recycle their retail flows (by passing them into the wholesale market) and so their options are limited. First, they can broaden their offerings to include new asset classes (such as option overlays, bonds and mutual funds) or new capabilities (such as night-trading in the US market) – putting significant strain on existing broker platforms designed to run only for a single market and a single trading day. Or they can expand their margin lending revenues by broadening the range of assets that investors can leverage (into US equities, for example) – but that requires investment in new risk management tools for global securities. Either way, growth requires investment and short-term cost.

Whilst the renewed IPO momentum in Hong Kong this year has provided some respite for brokers, the longer-term equation for securities houses is inescapable: how to drive customer scale, reduce unit costs and expand quickly? The metaphor of changing the wheels of a car whilst driving 100 km/h seems extremely apt.

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