Below is the piece on how many have overlooked the implications of T+3 which came into effect after the 97 crisis. Prior to that the market was on T+7, and had very little requirement on deposit as well. The article which I had written looked at the impact on property prices, but there are broader implications as well:
a) Remisiers - Safe to say that the 90s saw a lot of dealers and remisiers turning themselves into millionaires. Unfortunately many also saw their deposits being wiped out by the client losses. The superbull run of the 90s saw many turning in their day to day jobs, even doctors and engineers, to become a remisier. Everyone can do their math well. One percent commission and on a 30%-40% share, you need very little turnover to start making serious money. When so many people have a few trading accounts with various houses on little or no deposit, it was so easy to have maybe a few hundred thousand ringgit worth of stocks on contra at any one time. Each one hundred thousand was worth 1% in commission or RM1,000 to the remisier, and being contra trades, you know the bugger (including me) will have to sell it by T+7, thus doubling the commission. Plus they are not strict on the T+7, you can actually drag it for at least a couple of days more as the backroom systems at most brokerages were archaic still. Takes a couple of days before the staff could cover the mountain of paperwork to clear the contra positions. Can you imagine if a remisier had 20 of such clients, you would be rolling in it... in a superbull run. In many ways, that situation was even worse than than the credit bubble in the US. No money down but can buy a couple of hundred thousands worth of stocks - where else is that possible.
We all know the downside to that. Now we have too many remisiers with not enough business. Rates have also come down a lot, and will go down some more in the future, believe you me. The future of the industry lies in internet broking. Each passing day, more and more people will be switching to internet broking. The only ones left are those who are not computer or net savvy enough, and they are a dying and diminishing breed. Soon, rates for normal trades will have to come down very close to internet broking rates in order to compete. That will only mean needing a lot more turnover just to maintain the same level of commissions.
When you enter an industry it was based on the industry fundamentals, and after a few years the fundamentals have changed dramatically. We really have to reassess if that is still a viable industry to be in. In many ways, its a lot like working for the US auto industry, things looked good 10 years ago, heck, it looked even better 20 years ago. But now.... We all have to plan our career the way we read markets, things never stay the same, industry evolves and changes, all remisiers have to ask themselves seriously if its worth staying on. Of course, some will be at a roadblock as they may think it might be too late to change jobs now. If you are still below 40, its not too late, heck, if you are below 45 its still not too late cause the future is not that attractive. Its an industry that does not fire you, its self-employment, you have to fire yourself. If you were running that as a business, be objective, you may have to close shop already.
b) Superbull run - All remisiers will comfort themselves, well I just need to have one more bull run, then I will quit. Well, the trouble is that we think the bull run will be like the bull run of the 90s. That will never happen again. The rules have changed. In 94 and 95, there were some trading days when our trading volume surpassed America, can you believe that. That is possible because of the no deposit requirement. That is never going to happen again. Can we get back the 1 billion shares per day trading average.. maybe, but it won't be for an extended period like in the 90s.
c) Multiplier effect - The Malaysian stockmarket has one of the world's highest % of GDP that is listed. Every time some businesses starts making RM2m-3m a year in profit, there will be ripe for bankers to come and try to list them. Thats why our % is more than 80%, whereas in places like Germany only half of their GDP is listed - i.e. a lot of wealth and businesses are still kept as private entities. What that means is that in a bull run, our broader economy will benefit from a much higher multiplier effect, the velocity of money will be stronger. The reverse is true, if there is a bear market, we will experience a sharper contraction. We are very much like HK and Singapore in that respect, except that our multiplier is even higher.
This round of bear market has not seen a similar contraction because of the T+3 in Malaysia, and also that most private investors can see the long slow death of the markets coming from a mile away. Thanks to the T+3 rule, all economists worth their salt will have to adjust their forecasts as the experiences of the 90s and even the 80s will not apply totally.
d) Bursa/MOF - The authorities need to wise up, T+3 is good for the well-functioning and integrity of the markets. But you should also look at the net effects on volume and turnover which affects the livelihood of remisiers. One way is to introduce more liberal trading rules to boost volume and participation levels. I have had meetings with officials from the Bursa and mentioned that you can boost daily volumes by at least 20% by implementing two new rules:
1- allow for day-shorting. That means, all investors can short stocks for the day but must cover by the end of the day. Failing to do so will incur the same buy-in penalties. The only glitch to that proposal is when a counter is suspended during middle of the day. I am sure you can come up with a reasonable solution to that. I would suggest that counters that are suspended in the middle of a trading day, those who have shorted the counter should not be penalised, but will have to cover the day the counter resume trading.
2 - reduced commission for day trades. That might seem to reduce commissions for remisiers, but this is necessary to encourage day traders. Implement this together will allowance for day-shorting will definitely yield more net benefits. Volume, liquidity and total aggregate commissions will be enhanced. I would suggest day trades commission be reduced from the current 0.5%-0.75% to 0.3%-0.55%. You will definitely get the other side of the commissions by the end of the day anyway.
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The stock market effect in Malaysia - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.
I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.
Since 2000 every major financial calamity has not seen similar catastrophic personal financial aftermaths. Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.
This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign. Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.
Hence market commentators should keep this in mind when comparing similar wealth effects prior to 2000 and after. The magnitude of the above financial effect on the broader population should not be underestimated.
p/s photos: Dian Sastro
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