The Hong Kong brokerage market is in flux. The COVID-19 pandemic introduced massive volatility and terrific opportunities for both brokers and their investor clients to generate returns. That’s true worldwide, but Hong Kong has unique characteristics that are now pressuring both domestic and international players to be as operationally efficient as possible.
Three factors differentiate brokerage in Hong Kong. The first two represent opportunities: domestic investor demands are changing, fast; and international investors are racing to take advantage of China’s financial opening.
These trends offer a way for the industry to blunt competition from new digital brokers offering zero commissions, rising costs, and other challenges to profitability.
But the third trend is adding to their costs, which is increasing regulation. Regulatory costs are a factor worldwide, but Hong Kong’s regulators have plainly indicated they are raising the bar for compliance.
There’s a huge need for automated solutions, but the local market is also fragmented among systems and vendors. “This makes it hard to transform the entire market,” said Danny Green, London-based head of international post-trade business at technology company Broadridge.
A recent report by Broadridge, “Asian Brokerage in Transformation”, reveals how quickly local investor tastes are changing. After Hong Kong equities, investors in Hong Kong mostly invest in North American stocks, followed by Asian stocks. US equities have been the mainstay of international portfolios.
This began to change in 2020. Although the overall allocation to new asset classes is still modest, the rate of change is high: last year 52% of Hong Kong investors have begun to rebalance. They are diversifying into fixed income, futures and options, currencies, private equity and mutual funds.
Domestic brokers are surprised. They are not equipped to process, clear, settle and report on all these different asset classes. This comes on top of the COVID shock, which has forced all market players to evaluate how well they can manage spiking volumes.
“From a volumes perspective, it’s been a great year, but firms now have more transactions to report,” said James Marsden, Tokyo-based managing director of APAC post-trade business at Broadridge. “More transactions are generating an incredible amount of data, which also has to be handled.”
Domestic brokers are looking anew at technology solutions. Green says the advantage of partnering with a global vendor is that they bring global experience – they can provide advice, not just tech – and big R&D budgets to keep innovating.
Tasks like compliance and reporting are not competitive advantages for brokers. They just need to accomplish these as efficiently as possible. Global vendors such as Broadridge mutualize the costs that go into developing world-class solutions, so brokers don’t have to risk buying expensive, bespoke products.
Broadridge is not just providing the core post-trade processing and market connectivity. It is spearheading what it calls the “ABCDs of Innovation”.
It is investing heavily in data frameworks (“Digital”) and “C”, cloud hosting. Its experience with “B”, blockchain projects such as Australia Stock Exchange’s migration to distributed-ledger processing, means Broadridge can advise brokers how to best connect to Hong Kong Exchange’s own new Synapse platform that uses DAML smart contracts for Stock Connect and Bond Connect.
This leads to the challenges for international brokers operating in Hong Kong. The opening of mainland China’s capital markets is just beginning a giant shift. Global portfolios follow China’s entry into mainstream equity indexes, and as bond managers seek exposure to attractive yields from China government bonds.
But accessing China’s markets is hard for foreigners unless they are clearing and settling domestically in Hong Kong. HKEX’s Synapse will use smart contracts to smooth the way for overnight investors to meet China’s T+0 settlement cycle without having to prefund their trades.
Broadridge is playing a key role in supporting international brokers’ operations in Hong Kong, from connecting to updated SWIFT messages to plugging into Project Synapse.
The “A” in the ABCDs of Innovation is artificial intelligence, and at its core AI is about data and scale. This is where Broadridge is transforming data into actionable insights to help brokers deal streamline operations, improve experiences and drive revenue.
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- The ABCDs of Innovation
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Singapore-based machine-learning specialist Tookitaki Holdings is providing tools with smart layers of control to support a new initiative from Broadridge, called Broadridge Data Control Intelligent Automation. This uses AI to support industry-wide reconciliation, matching and exception management applications.
This is a breakthrough use of AI, because most reconciliation products are designed for specific uses, which leaves financial institutions with a confusing mix of solutions that can’t communicate. Intelligent Automation operates seamlessly across functions and enables third-party reconciliation software to interoperate.
Efficiency is critical to manage the pace of increased regulation, much of it coming from the European Union – which also impacts Asian firms. In 2021 attention will turn to the EU’s incoming rules to eliminate settlement failures, which will force financial institutions everywhere to invest in automation.
In Hong Kong, the Monetary Authority has also made clear it now expects banks and brokers to adopt regtech solutions, so it can monitor markets and supervise firms more effectively. The Securities and Futures Commission is backing legislation to give it access to firm’s cloud-hosted data.
Tookitaki’s machine learning provides a level of transparency to meet these challenges, such as its “explainability” framework that lets firms view the engine’s decisions, in order to build trust in the application. Broadridge and Tookitaki are also collaborating on other use cases, such as AML, to provide clients with a strong line of defense, manage risk and meet AML regulation.
The multi-asset story is good news for the local industry, and market access to China is good news for international brokers. Increased regulation will be ultimately good for investors. But these trends bring massive challenges. Broadridge is not just a vendor – and not even just a technology innovator. It is the bridge connecting Hong Kong, China, and the world, centered on helping the Hong Kong broker industry.