On online trading commissions in the Philippines

When I first looked into trying my hand in the Philippine stock market and opening an online brokerage account, I was pleasantly surprised by the number of online platforms available to retail investors. There are 31 online brokers on this list on the Philippine Stock Exchange website. Quite a few are backed by major Philippine banks like BDO, BPI, and Metrobank, while many more are independent brokerage houses. At least nine of them run on the PSETradex platform provided by the Philippine Stock Exchange itself.

Before this, my only experience with trading stocks was in the U.S. with brokers like Ally, Robinhood, and now Charles Schwab. Recent competition among U.S. online brokers have driven down the cost of trading commissions to the bare minimum: $0. Charles Schwab charged $29.95 per trade in 1998. Before dropping the rate to $0 in October 2019, it was charging $4.95 per trade.

While U.S. online brokerages competed on commissions, there appears to be no such competition in the Philippines. I discussed the costs of stock trading in the Philippines in a previous post. I haven’t found a Philippine broker that charges less than 0.25% of the gross transaction as commission. They all also charge the minimum PHP 20 if 0.25% of the transaction amount is less than PHP 20. This 0.25% rate apparently is the minimum allowed by the PSE and was set in October 2002.

Interestingly, it appears that Philippine President Marcos, way back in 1973 while the Philippines was under martial law, issued Presidential Decree No. 154, s. 1973: Reducing the Commission Charged by Stockbrokers to Customers capping the maximum commission charged to 1%. The relevant section says:

Section 1. Rate of Brokers’ Commission. No stockbroker using the facilities of any stock exchange shall charge, collect or receive a commission of more than 1% of the value of each transaction, whether a purchase or a sale, but in no case shall the commission be less than twenty (P20.00) pesos for a transaction

Since the decree was supposed to reduce commissions, I presume that the maximum was higher than 1% before this decree was issued. Funnily, the absolute minimum PHP 20 lives on, almost 50 years later.

The Philippine Stock Exchange set the minimum 0.25% rate in 2002, according to this Philippine Star news report. I do not know whether the 1% cap set by Marcos was still the prevailing rule at that time. The article mentioned that the “fully negotiated commission rate system has led to a price war” that affected the ability of brokers to make a profit. The article also mentioned that at that time Hong Kong was also charging 0.25% and that Thailand just reimposed the same 0.25% rate.

It’s interesting that somehow 0.25% became a preferred number. Why not 0.20% or 0.30%? It appears entirely arbitrary. If I have to guess, 0.25% became the number since the Americans used that rate from 1792 (Buttonwood Agreement) until May 1, 1975. The Great Unfixing tells the story of how that 183-year era of fixed minimum commissions ended. It was controversial and those who were against the rule change argued “that fixed commissions were needed to keep the industry profitable”, the same argument used to impose the minimum 0.25% commission by the Philippine Stock Exchange in 2002. According to The Great Unfixing:

Public participation in the stock market skyrocketed. Some 15 percent of households had some degree of exposure to equities in 1975, a figure that would rise to around 50 percent three decades later.

Concerns that the brokerage industry would be crippled were overblown. But it did have to change. Fee-based arrangements became increasingly common as commissions plunged. Brokers who had focused on stock transactions increasingly took on a broader mission of financial advice and planning. Research magazine’s shifting tagline reflected this trend, going from “All a broker needs to succeed” to “Helping advisors help their clients.”

From the perspective of three and a half decades, May Day was a success.

Of course, it’s not fair to compare the Philippine Stock Market to the New York Stock Exchange or NASDAQ. But the 2019 Philippine market has a lot more participants than in 2002. According to the PSE, there were more than 1 million stock market accounts in 2018, and the growth was mainly due to online stock trading accounts that grew 61% from 2017 to 2018. (PHL stock market accounts hit 1 million in 2018)

Unless I’m mistaken, all 31 online brokers are charging the minimum 0.25% rate. There is no effective competition. Online trading in 2019 should not be as expensive as trading through traditional brokers in 2002. Online trading has grown in spite of this fixed pricing. Imagine how much more it can grow if there is more competition among online brokers. The PSE should consider amending their minimum brokerage commission rates. Maybe this is something the Philippine Competition Commission can look into.

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