Research on Securities Brokerage Business Innovation and Risk ...

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?Abstract? For a long time in China, securities brokerage is regarded as business to provide stock trading service and get commission. Revenue from brokerage business averagely stands for more than 50 percent of total revenue of a securities company. Recent years witnessed great internal and external environment changes of securities brokerage business, including flexible commission for stock trading, diminishing separate operation of financial institutes. Those changes pushed securities companies to discover and try new business model for securities brokerage business. In practice, most innovation limited to sales or promotion, while little consideration was given to company strategy and overall marketing system. Therefore, to systematically study innovation of Chinese securities brokerage business will be a great help to industrial practice as well as academic research. There is nearly no oversea academic paper on Chinese securities brokerage business. Domestic research usually focused on one aspect and the definition of securities brokerage business was usually too limited. Innovation of securities brokerage business is a systematic project, which is closely related to China capital market development, internal and external environment of Securities Company, etc. From a view of capital market development, this paper tries to analyze the way of brokerage business innovation, matched development on organization structure and framework of innovation risk management. To analyze the industry dynamic and current environment of securities brokerage business will help us to study innovation. Brokerage business is the corner of Securities Company, not only for it brings high proportion of total revenue, but also for it bases asset management and investment banking. Brokerage business is an important marketing and distribution channel of Securities Company. Compared with US, Chinese securities brokerage business is quite different in many aspects, such as product, customer segment and pricing. It is the mixed operation of financial sector in US, development of capital market and regulation & policy that make the difference. So, development of Chinese securities market will promote brokerage business innovation. Among various changing environment, most influential factors to securities brokerage business are peoples?increasing demand for asset management, the growth of institutional investors, and policy of flexible commission, trend for financial sector mixed operation and technology development. Given such environment, which ways can Securities Company go for brokerage business innovation? Securities brokerage business in fact is product and service Securities Company offered. From marketing perspective, basing on target customer, brokerage business can also be analyzed from product, place, price and promotion. So, apply marketing theory to securities brokerage, we can find out innovation ways from ?4P?points. Securities Company has more common customer with other financial institutes along with capital market development. Individual investors pay more attention to company?s ability to meet their asset management demand when selecting Securities Company. Various financial institutes provide asset management product and pools individual assets to form institutional investor, so it is practical to cross-sell their asset management products to individual to explore the institutional clients. This is especially suitable to middle and small securities companies. Distribution channels can be classified as company?s own branches, brokers and cooperation with other financial institute. Those three have different target customer and provide different service. Technology such as E-commerce is technical support for those distribution channels. As to product, the traditional brokerage mainly focused on securities traded in Shanghai Securities Exchange and Shenzhen Stock Exchange. The innovation on product could be stimulated by new financial instrument launch and demand of investors. From a long run, the function of brokerage business can expanded to trade service (including securities traded in Exchange or OTC), distribution platform for various financial products and all over investment consultant service. The promotionfor securities brokerage can be company-oriented with serial promotion activities or broker-oriented carried by individuals. These two have different target customer and promotion effect. The combination of discontinuous company-oriented promotion and continuous broker-oriented is optimal. Pricing actually reflects environment change, innovation and the development of business model. Development of pricing is a result of innovation in target customer, product, place and promotion. The value of trading service only is reduced in securities brokerage. The pricing model is changing from commission-based to fee-based. At the same time, pricing strategy will change from competition-oriented to demand-oriented to realize the company?s strategy. Business innovation needs suitable organization structure and business process. In securities brokerage business innovation, Securities Company will face two problems. 1) Due to the large gap among various regions in China, branches face different competition. Therefore, it is necessary to balance unification and difference for branches in a company.2) Innovation also brings new risks, including law & regulation risk, market risk and operation risk, etc. Securities Company should have more techniques to balance return and risk. To enhance the effectiveness and efficiency of securities brokerage business innovation, organization structure rearrangement and business process reengineering are necessary. It relates to the function of brokerage business system in the whole company. 1) From the view of company, a marketing department should be set for all business and clients. What customer segment to target for brokerage business and difference between first-market business and second-market business are main factors should be considered in setting marketing department. Companies with brokerage business dominated can add the company-level marketing function in brokerage business system. 2) Through business process reengineering, business innovation can be stimulated by combination of research and demand instead of research only. 3) In brokerage business system, the right of company and branches can be properly defined to balance company unification and regional difference. At the same time, it is reasonable that several kinds of brokers exist in one company. However, the ability to recruit, incentive and develop excellent brokers, unification between brokers?benefits and customer?s benefits will help to build up core competition advantage ofbrokers team. Pricing and Place reflect business strategy and management thoughts. The present high commission rate under price alliance actually functions like modified fee-based. What will development from commission-based to fee-based pricing impact on securities companies, investors and securities market? Through experimental study on Northwest Securities, the following conclusion can be drawn. 1) Turn from present high commission to fee-based can increase market liquidity. 2) It is practical to price the commission for stock trading and value-added service separately, while sell combined as a middle-stage strategy in the change from commission-model to fee-model. Securities brokerage business strategy decides channel construction. Channel construction and synergy should accords with customer target and product plan. The total asset management demand of individual can be classified as direct investment in securities and entrust asset management. It is effective to focus on individual customer while explore both individual and institutional markets. So, to explore individual investors should be emphasized in channel construction. At the same time, an effective channel distribution should properly integrate branches, brokers and cooperation with other institutes. The location of branches and brokers are usually the same. They can serve customer both direct investments in securities and entrust. Cooperation with other institutes is complementarities for the other two channels, and serves for direct investment in securities. Basing on analysis on demand for direct investment in securities and entrusted asset management in certain province and cities, the paper draws the following conclusions. 1) Apart from Beijing, Shanghai and Guangdong, whose total volume and preference of securities investment are obviously highly than average, the other 28 provinces in China are comparable. It is practical to evaluate potential for securities investment of a province from the number of A-share accounts and revenue for insurance fee. 2) Among 26 cities under analysis, some cities can be further explored respectively for cooperation with other financial institutes, for setting own branches and for brokers network. 3) In the practice of channel construction for securities brokerage business, it is necessary to further analyze the reason that cause gap between current business volume and potential. Input/output analysis for a certaincity is also necessary. It is the core technique for financial institute to balance return and risk. Innovation of brokerage business will bring new risks. They are mainly strategy risk, law & regulation risk, operational risk and new business risk. Innovation risk should be managed in the risk management framework of whole company. The effectiveness of the whole risk management system is a precondition to manage innovation risk. Risk management committee, risk management division and risk management position in branches should be in place to form three-level structure for brokerage business innovation risk. The paper also puts forward risk valuation measure and multiple-level and multiple-factor fuzzy risk valuation system for risks in securities brokerage business innovation.

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Source: http://www.economics-papers.com/?p=17038

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