The move to revise stock transaction costs by the Securities and Exchange Commission (SEC) is timely according to some industry stakeholders as transaction costs in Sri Lanka is one of the highest in the world, but brokers say it's an uncalled-for directive that is hitting their bottom lines.
The SEC has stipulated 1.020% as the transaction cost on the turnover of a trade up to Rs 50 million with effect from July 1. Now 1.425% is charged up to a one million-rupee transaction, and from Rs 1 million to Rs 100 million 1.225% is charged.
"The brokers kept the market rolling through the difficult times and they're looking at expanding. The brokers in the market are doing a valiant task by expanding the network by opening branches and getting new investors to the market. Cutting the revenue of such organizations will curtail such expansion and slow down the progress of the brokers," Thakshila Hulangamuwa, Vice President at brokerage Asha Phillips, noted.
Some say that it's a timely directive as it will enhance market liquidity. "The US transaction costs are closer to 0.1% of turnover and the reduced transaction costs will ensure higher liquidity in the market," Deshan Pushparajah, Assistant Manager Corporate Finance, Capital Alliance, mostly into fund management, told the Business Times.
However, Mr. Hulangamuwa noted that it's not appropriate to kill the goose (that laid the golden eggs). "If at all the requirement is to increase the liquidity. What the authorities should have looked at is to initially encourage more companies to list and introduce derivatives and other instruments that can boost activity," he said.
An investor said that 'brokers were sitting pretty' with almost the same client base as three years ago and earning brokerage on higher turnover levels and that this ruling will hit their top line directly, forcing them to go out and find new clients.
An analyst agreed, saying that there is a large untapped base both in Sri Lanka and in other countries which the stockbrokers should tap.
The analyst said that it's a motivation for the stockbrokers to go out and find new clients with the new transaction costs kicking in and that foreigners will look at the market more favourably. "This will bring in larger big volume trades," he added.
But Mr. Hulangamuwa noted that it would have been best if the brokers were consulted or some expert advice sought from those who are involved in markets before such a directive is issued. "There are enough experienced brokers and professionals who could have given a better direction with regard to increasing liquidity and we cannot compare our market with the regional markets as we are far below those levels in terms of size and volume, which is why we have to do what is necessary in stages," he added.
He also noted that now is the time that derivatives should be in place. "With this instrument the volumes in the market increases and activities will shoot really high. At that point you will have to cut the transaction cost to support the traders as the volumes increases. The need of the hour is to introduce derivatives, etc; not cutting costs. Now that the directive is already given, it's best that derivatives are introduced immediately to make things look sensible."