AS brokerages in Hong Kong and Shanghai prepare for the introduction in October of mutual trading of securities between their cities’ bourses, the big mainland players stand to benefit more, posing a threat to smaller Hong Kong-based brokerages.

    Under the Shanghai-Hong Kong stock connect program, foreign investors will place buy or sell orders on Shanghai’s A-share market through brokerages in Hong Kong, while mainland investors who want to invest in Hong Kong’s H-share market will be able to use brokerages on the mainland.

    Currently, foreigners only have very limited access to the A-share market under pilot programs, which allocate quotas, such as QFII (Qualified Foreign Institutional Investor) and Renminbi QFII.

    The new program will also involve quotas, but opens doors for retail investors.

    The upcoming change provides a golden opportunity for mainland brokerages that have long had a presence in Hong Kong without becoming big hitters in the city.

    The rise of mainland brokerages, thanks to lower operating costs, more extensive research coverage, a full suite of capital market services and cheaper brokerage costs will result in a wave of consolidation among Hong Kong’s mom and pop brokerages, and lower tier foreign investment banks.

    “The through train program may lead to some industry consolidation among the smaller players in Hong Kong,” said Chris Lai, Hong Kong and mainland banks analyst at Bank of America Merrill Lynch in Hong Kong, referring to the stock connect program.

    Only bigger brokerages will be able to easily afford the investment needed to build trading systems for the stock program, and adapt to the different trading hours and settlement dates in Hong Kong and Shanghai.

    By industry standards, Hong Kong is a fragmented market with many small brokerages, some of which operate out of single-room offices and employ only a few workers. More than 500 brokerages compete for business in the city’s open market, with the top 14 accounting for more than half of turnover.

    In comparison, the mainland has 114 brokerages, with none of the top-tier brokerage firms having a market share of more than 10 percent.

    The stock connect program will be a boon to brokerages who have seen turnover and equity offerings shrink on the world’s 6th and 7th-biggest stock markets due to a dimmer economic outlook.

    While turnover on the Hong Kong market has steadily declined in recent years, its army of brokerages have fought over a shrinking pie, leaving them vulnerable to the onslaught from mainland brokerages.

    Compared with their Hong Kong counterparts, mainland brokerages have far greater A-share research coverage, years of operating experience in the onshore markets and a lower fee structure.

    Leading the charge will be Haitong Securities, Citic Securities and Galaxy Securities.

    Having previously had little more than a toehold in Hong Kong’s brokerage market, they have deepened their presence in recent years by acquiring competitors and raising funds.

    In 2009, Haitong Securities bought a majority stake in Taifook, in the first-ever acquisition of a Hong Kong brokerage by a mainland securities company. And last year, the mainland’s biggest securities company Citic Securities bought an 80 percent stake in CLSA, formerly owned by French bank Credit Agricole.

    Wilson Hui, group executive director of Haitong International Securities Group, said that mainland players with a presence in both markets will benefit the most, and “will enjoy a competitive edge over local brokers.” (SD-Agencies)