Cheaper Stock Brokerage?

Of late, the competition in stock brokerage has intensified drastically with non-clearing members offering brokerage rates unheard of previously. As with all cheap things, there is always a catch to it. If you are thinking of fattening your trading profits or reducing your trading losses, do read the fine print carefully. The list of clearing members in the case of Singapore is available at www.sgx.com The differential between trading with clearing and non-clearing members are mainly as follows:

  1. For trades with clearing members, stocks would be placed in a custodial company or custodial division of the stock exchange that would also have a common modus operandi with companies providing share registrar service. Trades though non-clearing members are normally held in a separate custodial company normally owned by the non-clearing member as well. Some do use the custodial services not owned or operated by them.
  2. Voting rights at annual or extraordinary general meetings are non-existent for the smaller retail traders as the custodial company is listed as the owner of the shares. If you are a big player, arrangements can be made for the custodial company to proxy it back to you. If you are in the habit of collecting nicely printed annual reports for your coffee table, there will be none in this case. The situation is similar to trading using CPF and SRS funds.
  3. The custodial fees charged by the custodial company are standard and transparent and same for all clearing member. The custodial fees and fees structure varies widely and this is where the savings on brokerage fees can get wiped out. The fee structure for custodial fee can be broadly classed into transaction fees for buy and/or sell and a custodian charge levied based on a mix of quantity and value of share as well as the custodian period.
  4. Switching between clearing members is seamless because of a common custodial operator so the clearing members fight tooth and nail for customers especially institutional and private clients. Switching from a non-clearing member either to a clearing or another non-clearing member can be a nightmare as any existing open positions would have to be unwound in one way or another and this is most probably not where anyone wants to be in. The switching cost can be very high and the process tedious. Once the non-clearing members have you, they have you for good ad infinitum because of this switching nightmare.
  5. The security of the custody is normally more secured because the common custodial service has a more protective legal framework to guard owners interest in case of liquidation, bankruptcies or dissolution. For non-clearing member, the protection element varies. After Lehman Brothers, no one is too big to fail.
  6. Most non-clearing members tend to be larger and international geographically and might hold non-clearing or clearing memberships in markets outside of Singapore. Very useful for trading across markets.
  7. These non-clearing member also tend to have more products especially forex based products that can lower your forex transaction cost by offering more competitive forex rates on spot or forward hedging options as well positions in multiple currencies on demand or fixed tenure. Only applies to the more sophisticated traders.
Before making any brokerage decisions, you cannot be too careful especially with non-clearing members and only trading on the local market not that I have anything against them.

Peter Lye aka lkypeter
Safe Harbor
Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Copyrights of all contents in this blog belongs to Peter Lye unless stated otherwise.
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