The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism—Joseph Schumpeter
Special Report: The Four Major Forces Influencing the PSE’s Brokerage Industry
The brokerage industry will continue to be impacted by four significant factors, mainly rooted from creative destruction: the shift to online trade, the downtrend in trading volume, asymmetric regulations, and the global trend of zero-bound commission rates.
Creative Destruction: The Shift to Online accounts
Client accounts jumped 25.4% to 1.09 million in 2018, according to the PSE. That’s still less than 1% of the total over 100 million population (108 million 2019 by Worldometer) or 1.4% of the estimated 73.5 million labor force.
Online accounts delivered over 100% of growth in 2018. Online accounts grew by 60.92% to 236,900, but brick and mortar accounts contracted 3.4% or by 16,266 accounts.
Online accounts have come to dominate the PSE’s client base with 57.44% share in 2018 from 44.76% in 2017. According to the PSE’s data, the age brackets of 18 to 44 years captures about 70% share of online participants.
Total accounts growth spiked as retail participants chased 2017’s 25.11% returns and as the PSE reached 9,058.62 on 29th January 2018.
Shrinking Peso Trading Volume
Aside from the shift to the online platform, the second fundamental force affecting the PSE has been trading volume.
From 2009 to 2013, the PSEi carved a record high, backed by substantial volume expansion, signifying a genuine boom. That all changed after. Trading volume has been downhill since.
When the PSEi reached a fresh milepost of 9,058.62 in January 2018, this was primarily because of a narrowing breadth of participation, or increasing concentration of trading activities toward a few index sensitive issues.
For instance, the Sy Group of companies accounted for a whopping 32.95% share of the free float market index, as of November 2019, significantly higher than the 21.34% in November 2015. In perspective, the Sy group’s share of the index rocketed by a stunning 54% in 4 years at the expense of most of the member issues!
Five firms account for 49% of the free float market cap or the headline index, as of the 5th of December 2019. Five issues are all it takes to move the headline index!
That’s the result of sustained marking the close pumps mostly concentrated on the Sy Group of companies. And this week’s magnificent facelifts!
Bloomberg publishes charts of most of the global bourses. It includes intraday charts.
Not a single benchmark in any of these bourses features an almost daily substantial marking-the-closes.
Anyway, ironically, as the peso trading volume declined, retail participation in the stock market trading escalated in 2018. The low volume rip eventually took its toll, the headline index retreated from its peak of 9,058 and have trudged since. New retail accounts, which likely chased the 2017-2018 runup, have been, mostly, bruised.
More importantly, the cascading peso trading volume has resonated with the BSP’s data of the banking system’s dwindling cash reserves, which also began in 2013. The shortfall in the banking system’s liquidity has percolated and affected the PSE’s trading volume.
In the 11-months of 2019, because of block sales, the cumulative peso trading volume was up 7.9% YoY. However, based on the board's transactions, the total 11-month peso turnover was down slightly by .92%, even when the PSEi posted a 3.7% return over the same period.
Furthermore, because a sustainable bull market depends on a concordant growth in volume, the deterioration in peso volume has prompted a redistribution from the broad market to select issues of the PSEi, which has been a consequence of selective pumping.
Selling activities have dominated trading activities in the PSEi even when the index hit 9,058 in January 2018. The decaying internals has been consistent until now.
So unless liquidity in the banking system improves, or unless foreigners become aggressively bullish the on domestic equities, the PSE’s peso trading turnover can be expected to remain lackluster.
And here is the thing. Brick and mortar brokers will be contesting a contracting share of clients in the face of diminishing peso turnover. Of the 130 active brokers, 30 have online facilities.
Given this scenario, the latest R&L Investment scandal shouldn’t be a surprise.
Asymmetric Regulations
The third force would be the regulatory environment.
Considering the difference in the operating platforms, regulations on brokers will diverge, which should likely favor online operators.
The R&L Investment scandal will possibly further skew the regulatory bias against the traditional brokers.
Moreover, aside from likely regulatory bias, the scandal will likely draw traditional accounts toward online operators, furthering the challenges of the brick and mortar platform.
Zero Bound Commission
The fourth critical force that would likely induce a radical change in the business model of the brokerage industry is the zero bound commission rates. The US has broken the ice.
From CNBC: “There may be no free lunch in the financial services industry, but there is now free trading of stocks, exchange-traded funds and options. Charles Schwab announced on Oct. 2 it would eliminate commissions on those products for retail and registered investment advisor clients on its platform. TD Ameritrade and ETrade quickly matched Schwab, and Fidelity followed suit a week later. Pershing is the only major custodian not to have cut commission rates to zero. While the change was not a big surprise, it represents a major turning point in the wealth management industry.”
Despite the net selling in 10-months of 2019, not only have foreign funds dominated trading activities, their share of the total volume has been increasing since the end of 2017.
And for the PSE to attract fresh or maintain the current level of interest of foreign funds, it will have to compete with the world to lower transaction and opportunity costs. Hence, not only to spread globally, this zero-bound commission rate trend can be expected to be embraced by the local industry eventually.
The thing is, Joseph Schumpeter’s “gale of creative destruction”, brought about by innovation, would induce a potentially disruptive overhaul of the industry’s business model.
The transition towards the online platform, tumbling trading volume, regulatory inequality, and zero-bound rates are the four major forces that will continue to influence the brokerage industry.
The existing participants will have to adapt to such technology-induced changes to compete intensely in acquiring the growth segment of the industry's market. But adaption in itself is no guarantee of survival or success.
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