Is the securities industry ready for the "new arrivals"?

In October 2024, the average daily trading volume of A-shares reached 2.01 trillion yuan, which is 2.5 times that of September.

This is an intuitive reflection of the recovery in trading activity in the A-share market, and as early as during this year's "October 1st holiday," many securities firms welcomed a long-awaited busy period.

Many brokerages worked overtime to assist investors with account openings, and some brokerages admitted that the number of offline account openings during the National Day week exceeded that of the first half of this year.

In the face of the hot A-share market since the end of September, a large number of "new investors" have entered the market one after another.

Before the sentiment hit bottom, the brokerage business of listed securities firms was in a "darkest hour" during the first three quarters of this year, with as many as 40 brokerages experiencing a year-on-year decline in brokerage revenue during the same period.

Looking ahead to the fourth quarter, as new investors "rush in," the brokerage business may be entering a recovery phase after a long period of sluggishness.

The soaring market sentiment may not necessarily be a good thing for securities firms.

Currently, the number of young "new investors" driven by short videos and other streaming media has increased significantly, and their methods of information acquisition and investment decision-making logic have formed a huge contrast with the previous market state.

When the dominant "emotion" diverges from the "rationality" required for investment, how should brokerages make decisions in the face of this influx of new generation investors and special market sentiment?

Should they take full advantage of this to convert it into commission growth, or should they adhere to the principle of aligning with client interests and cautiously guide the market, testing the long-term wisdom of the securities industry?

Bottom Reversal

The rapid transition between bull and bear markets has caught securities practitioners off guard.

In the first eight months of this year, the Shanghai Composite Index hovered below 3,000 points, and the average daily trading volume across the market was only 0.76 trillion yuan; by the end of August, the margin financing balance was only 1.39 trillion yuan, a decrease of 16.27% from the beginning of the year.

During this period, some brokerage offices reported that only 4-5 clients visited in a week, even fewer than the number of staff.

Additionally, investment banking personnel from leading brokerages told TradeWind (ID:TradeWind01) that due to the sluggishness of investment banking and brokerage businesses, the company even required investment banking personnel to participate in the promotion of wealth management and other products.

However, with the improvement in the market since the end of September, brokerages may be emerging from their darkest hour.

In the short 19 trading days of September, the Shanghai Composite Index, Shenzhen Component Index, and ChiNext Index rose by 19%, 29%, and 42%, respectively.

This led to a further increase in trading volume. The average daily trading volume in October reached 2.01 trillion yuan, more than doubling month-on-month.

The marginal improvement in the performance of securities companies has already revealed this signal.

In the third quarter of this year, among 50 listed brokerages, 34 achieved positive year-on-year revenue growth, accounting for nearly 70%, a significant improvement compared to the less than 40% of brokerages with positive revenue growth in the previous quarter.

With the stabilization of equity asset prices, the proprietary trading business of brokerages has become the first to benefit.

In the third quarter of 2024, the top 10 revenue-generating brokerages, including GF Securities (000776.SZ), Shenwan Hongyuan (000166.SZ), and China Merchants Securities (600999.SH), generated revenues of 2.28 billion yuan, 2.717 billion yuan, and 2.413 billion yuan, respectively, with year-on-year growth rates of 853.97%, 175%, and 201.57% However, under such market conditions, some brokerages are still dragged down by their proprietary trading, falling short of their peers in the market.

In the third quarter of 2024, among the listed brokerages, only Haitong, Zhongyuan, Xibu, Huaxin, and Caida saw their proprietary trading revenue decline year-on-year by 103.86%, 231.84%, 49%, 21.89%, and 21.79%, respectively.

Progress and Challenges

The renewed trading boom is becoming a supportive expectation for the accelerated recovery of the securities industry.

Since the market warmed up at the end of the third quarter this year, the trading activity in A-shares has reached a historical high.

As the first trading day after the National Day holiday, on October 8, A-shares recorded a massive trading volume of 3.48 trillion yuan, setting a new record for single-day trading volume.

However, in the face of such strong market enthusiasm, many brokerages failed to prepare in advance and continued to reduce their branch layouts amid recent market adjustments.

According to Wind data as of the end of 2023, among 39 brokerages with incomplete statistics, 23 brokerages saw a decrease in the number of their branches compared to 2021, accounting for nearly 60%.

Among them, China Galaxy, Hualin Securities, and Caida Securities had the largest reductions in branch numbers, with decreases of 32, 24, and 15 branches, respectively.

However, some brokerages are showing a trend of counter-cyclical expansion.

In absolute numbers, CITIC Securities, Soochow Securities, and Industrial Securities have made the most significant advances, adding 89, 13, and 15 branches, respectively, in 2023 compared to 2021.

Some brokerages are also acquiring more branches through mergers and acquisitions.

In August of this year, Guosen Securities (002736.SZ) announced plans to acquire Wanhe Securities. As of the end of June 2024, the two had 261 and 54 branches, respectively. Once the merger is completed, Guosen Securities is expected to have over 300 branches, closely approaching CITIC Securities.

The acquisition of Guodu Securities by Zheshang Securities (601878.SH) is also underway. As of the end of June this year, the former had 104 branches, and after the transaction is completed, its branch count may exceed 160.

On the other hand, while traditional branch channels are shrinking, internet securities business is becoming increasingly important as a frontier. Many brokerages have stated in their semi-annual reports this year that they will continue to expand their business through online finance.

With the increased convenience of online account opening, platforms like Alipay, WeChat, Xueqiu, and Tonghuashun are becoming the choices for more new investors.

On Alipay's "Direct Brokerage Access" interface, five brokerages, including Guotou, Guosen, CITIC JianTou, Industrial, and Caitong, have direct account opening services; the main partners for account opening on Tencent's Licai Tong are CMS and Hualin Securities.

At the same time, some brokerages are collaborating with influential financial influencers to attract new investors, using low commissions to entice them to open accounts.

Many brokerages have also launched investment education videos and live broadcasts on Douyin to attract users Sources close to China International Capital Corporation Wealth Securities indicated to Xinfeng (ID: TradeWind01) that during the highly enthusiastic period of October 1-2, the viewership of the live broadcast room of China International Capital Corporation Wealth exceeded one million.

Brokerages such as China Galaxy have launched free investment advisory services for new customers on Douyin.

These are responses made by industry institutions to the new market opportunities.

The "Welcoming Newcomers" Dilemma

It is important to note that the "investor profile" of new market entrants is quietly changing.

For instance, during this round of market activity, short video streaming platforms like Douyin have played a significant role in driving momentum.

According to data from Juyuan Analytics, from September 27 to October 8, when trading volume hit a new high, the keyword search index for A-shares on Douyin soared from 4.2384 million to 12.7786 million, more than doubling.

In terms of investment behavior, some new investors guided by streaming media exhibit characteristics such as being "emotional," "rarely focusing on fundamentals," "following influencers," and "easily swayed."

Moreover, in some discourse, the new generation of investors is more willing to use special jargon to describe listed companies or industries to avoid platform scrutiny.

For example, Hainengda (002583.SZ) uses "still can fight" as a substitute, A-shares use "A ancient" as a substitute; military industry is referred to as "military military," and chips as "chip chip," and so on.

The influx of these new investors has indeed played a role in activating market sentiment in the short term, objectively stimulating brokerage business.

Yao Pei, chief strategy analyst at Huachuang Securities, pointed out that in the past two years, live streaming sales on short video platforms may have formed habits of impulsive buying, group consumption, high-frequency returns, and emotional consumption. Once this customer group transitions to financial consumers, it may lead to increased trading volume.

However, looking back at history, the active atmosphere ignited by emotions is often difficult to sustain. The securities industry requires long-term accumulated trust, and the rational attitude needed in the investment process is clearly at odds with the aforementioned phenomena.

All of the above may be planting a special contradiction for brokerage business.

If extreme emotions are followed to accelerate "welcoming newcomers," it is possible that in the future, volatility may come at the cost of damaging long-term market image; conversely, if excessive caution and restraint are maintained at this time, it may result in losing the competition for this rare market flow among peers.

"Investment is rational, but many new investors driven by short videos are emotional investors, and there is a certain paradox between the two," pointed out an investor in Beijing. "How brokerages should help investors balance the contradiction between emotion and rational investment may be a higher-level test for the further development of investment advisory services."