Wednesday December 19, 2007
Remisier versus online trading
In this article, we will look into whether we should buy shares online or use our existing remisier’s services to execute trade
COMMISSION rates for Internet trading and cash upfront transactions will be fully negotiable next year.
Although the full details on the actual implementation are not available yet, if the commission on Internet trading drops to a low of 0.15% (it may be even lower for some stockbroking firms), retailers may be tempted to execute the online transactions themselves without going through their remisiers.
Based on the existing structure, most retailers are paying a brokerage fee of about 0.6% per transaction. Assuming some stockbroking companies are willing to offer commission rates of 0.15% for Internet trading, there will be savings of 0.45% for retailers who trade online.
Nevertheless, we need to understand that transaction costs have two main components: explicit cost and implicit cost.
Explicit cost is the direct cost of trading, such as brokerage commission, stamp duties and clearing fees. Implicit costs are indirect trading costs like opportunity cost, market impact and missed trade costs.
Opportunity cost is the loss of opportunities due to the time retailers are required to spend on executing stock transactions instead of focusing on their main business or their work.
If you are working and have limited time to monitor the stock market, you may still need the remisier’s services to execute stock transactions.
I personally feel that it is really not productive to stay in front of the computer just to execute a few stock transactions. Sometimes, it can be quite time consuming getting the best price.
Any retailer who wants to trade online needs the necessary skills to be able to read market movements. He needs to know whether the current price is the best price to buy, or wait for a while because he may get a cheaper price later.
Market impact is the realised profit or loss reflecting the price movement of a share from the price decided on to the execution price.
Since remisiers follow market movements throughout the day, they should be able to read those movements better than we do.
They may not be able to get the best price in every trade but if they are able to save one or two bids lower than your intended purchase price, the cost saving can be quite substantial.
For example, your remisier is able to get one bid lower for you when you want to purchase a stock priced at RM1.50. You will save 1 sen over RM1.50, which is 0.67%.
Assuming your remisier is able to do that in eight out of 10 trades, the average cost saving will be 0.53% (8/10 x 0.67%).
This saving will still be greater than the commission of 0.45% that you would have saved through online trading.
Besides, you have not taken into consideration the time you could have saved and the opportunity loss on your current business if you spend too much time on share trading. The extra 0.45% that you pay is for your remisier’s skills.
As mentioned earlier, besides opportunity costs and market impact, there are other implicit trading costs, like missed trade costs.
Missed trade costs arise from the failure to execute a trade in a timely manner.
If you split a purchase of 20 lots of Stock A into two equal limit orders when the quote for Stock A is RM11.00 to RM11.10, the first order is executed at the buying price of RM11.00, after which the quotation moves up to RM11.10 to RM11.20.
The second order is placed and executed at RM11.10. You are paying an additional 10 sen (or 0.9%) for the remaining 10 lots.
Missed trade will cost you an additional 0.45% (0.5 x 0.9%) as 50% of your remaining stocks were traded at a price that was 0.9% higher.
A good remisier should be able to save you the above implicit costs. In this competitive business environment, remisiers need to continue upgrading their skills in order to give better services to their clients.
Remisier versus online trading
In this article, we will look into whether we should buy shares online or use our existing remisier’s services to execute trade
COMMISSION rates for Internet trading and cash upfront transactions will be fully negotiable next year.
Although the full details on the actual implementation are not available yet, if the commission on Internet trading drops to a low of 0.15% (it may be even lower for some stockbroking firms), retailers may be tempted to execute the online transactions themselves without going through their remisiers.
Based on the existing structure, most retailers are paying a brokerage fee of about 0.6% per transaction. Assuming some stockbroking companies are willing to offer commission rates of 0.15% for Internet trading, there will be savings of 0.45% for retailers who trade online.
Nevertheless, we need to understand that transaction costs have two main components: explicit cost and implicit cost.
Explicit cost is the direct cost of trading, such as brokerage commission, stamp duties and clearing fees. Implicit costs are indirect trading costs like opportunity cost, market impact and missed trade costs.
Opportunity cost is the loss of opportunities due to the time retailers are required to spend on executing stock transactions instead of focusing on their main business or their work.
If you are working and have limited time to monitor the stock market, you may still need the remisier’s services to execute stock transactions.
I personally feel that it is really not productive to stay in front of the computer just to execute a few stock transactions. Sometimes, it can be quite time consuming getting the best price.
Any retailer who wants to trade online needs the necessary skills to be able to read market movements. He needs to know whether the current price is the best price to buy, or wait for a while because he may get a cheaper price later.
Market impact is the realised profit or loss reflecting the price movement of a share from the price decided on to the execution price.
Since remisiers follow market movements throughout the day, they should be able to read those movements better than we do.
They may not be able to get the best price in every trade but if they are able to save one or two bids lower than your intended purchase price, the cost saving can be quite substantial.
For example, your remisier is able to get one bid lower for you when you want to purchase a stock priced at RM1.50. You will save 1 sen over RM1.50, which is 0.67%.
Assuming your remisier is able to do that in eight out of 10 trades, the average cost saving will be 0.53% (8/10 x 0.67%).
This saving will still be greater than the commission of 0.45% that you would have saved through online trading.
Besides, you have not taken into consideration the time you could have saved and the opportunity loss on your current business if you spend too much time on share trading. The extra 0.45% that you pay is for your remisier’s skills.
As mentioned earlier, besides opportunity costs and market impact, there are other implicit trading costs, like missed trade costs.
Missed trade costs arise from the failure to execute a trade in a timely manner.
If you split a purchase of 20 lots of Stock A into two equal limit orders when the quote for Stock A is RM11.00 to RM11.10, the first order is executed at the buying price of RM11.00, after which the quotation moves up to RM11.10 to RM11.20.
The second order is placed and executed at RM11.10. You are paying an additional 10 sen (or 0.9%) for the remaining 10 lots.
Missed trade will cost you an additional 0.45% (0.5 x 0.9%) as 50% of your remaining stocks were traded at a price that was 0.9% higher.
A good remisier should be able to save you the above implicit costs. In this competitive business environment, remisiers need to continue upgrading their skills in order to give better services to their clients.
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