Discouraging effects of BO account maintenance fee
Tuesday, 13 July 2010
A.F.M. Mainul Ahsan
The Securities and Exchange Commission (SEC), the stock market regulator, has imposed an additional Tk 200 in annual maintenance fee on each beneficiary owner (BO) account. According to press reports, SEC took the decision to increase government revenue from stock market. The maintenance fee will go to the state coffer, and the government will receive around Tk 500 million a year from around 2.50 million active BO account holders. The SEC first introduced a Tk 300 annual maintenance fee in 2007 to stop the opening of fake or shady BO accounts.
On its website, SEC claims its goal is to protect the interests of securities investors, develop and maintain fair, transparent and efficient securities markets and ensure proper issuance of securities and compliance with securities laws. SEC's decision to increase BO account maintenance fee clearly violates at least the first two goals. How?
The effects of transaction cost on the stock markets have always been a central theme in research on finance. Different studies suggest that lower transaction cost is beneficial. Reduction in transactions costs have been linked to direct cost savings, indirect benefits through improvements in agency costs, monitoring or coordination within existing organizations and markets, and even the creation of new types of market structures that are more efficient. In addition, economists like James Tobin, Joseph Stiglitz, and Laurence Summers already showed that higher transaction costs discourage destabilizing investors with short-run horizons while being less costly for stabilizing investors with long-run horizons; and most of our investors has short-term investment horizon. Also, lower transaction cost encourages investors to arbitrage away any existing market anomaly which ultimately improves market efficiency.
Researchers like Eugene F. Fama, argued that sophisticated investors will trade against less informed investors and will drive prices close to intrinsic values and will ultimately improve market efficiency.
The decision to increase BO account maintenance fee will mainly discourage small investors to participate in the stock market. Let's consider an example. Tk. 5000 is the minimum amount that an investor can invest in the market. For instance, a small investor makes 20% next year, i.e., Tk 1000 (which is highly unlikely!) on his investment of Tk 5000. Now, he needs to pay Tk 500 as BO account maintenance fee. Putting aside the possibility of loss and also other transaction costs, e.g., broker commission, this investor is only making Tk 500 or 10% on his investment. If he had kept the money in the bank, he would have earned more than 10 percent without any hassle. Why should an investor take the risk? So, with this decision to increase BO account maintenance fee, the SEC is ultimately discoursing small investors to participate in the marketplace!
However, institutional or high net worth investors would not be hampered at all. Does it mean that SEC is here only to save institutional or rich investors' interest? Some critics say that SEC increased this maintenance fee to deter fake BO accounts. Well, we now have national identity card to identify fake BO accounts. Increasing BO account maintenance fee will not help SEC prevent opening of fake BO accounts.
Currently, a prospective investor pays up to Tk 1,000 to open a BO account. The SEC should even put a bar on the ridiculously high BO account initiation fee charged by brokerage houses. Thus, not only SEC should reduce existing BO account maintenance fee, it should also need to cut BO account initiation fee.
The SEC is moving away from its goal of protecting investors' interest. In the developed countries, to decrease transaction costs, market participants are getting innovative every day. For example, leading brokerage houses have gone fully online and charge lower fees than before. When the whole world is trying to reduce transaction cost, our regulator is increasing it to make money. If the government truly wants to make money it should focus on reforming the tax system. SEC is a public institution and it is not supposed to act as a money making machine for the government. Rather than focusing on making money, SEC must stick to its goal of protecting investors' interest and also to increase market efficiency.
The writer is a student at Texas Tech University. He can be reached at E-mail :mainul.ahsan@ttu.edu
The Securities and Exchange Commission (SEC), the stock market regulator, has imposed an additional Tk 200 in annual maintenance fee on each beneficiary owner (BO) account. According to press reports, SEC took the decision to increase government revenue from stock market. The maintenance fee will go to the state coffer, and the government will receive around Tk 500 million a year from around 2.50 million active BO account holders. The SEC first introduced a Tk 300 annual maintenance fee in 2007 to stop the opening of fake or shady BO accounts.
On its website, SEC claims its goal is to protect the interests of securities investors, develop and maintain fair, transparent and efficient securities markets and ensure proper issuance of securities and compliance with securities laws. SEC's decision to increase BO account maintenance fee clearly violates at least the first two goals. How?
The effects of transaction cost on the stock markets have always been a central theme in research on finance. Different studies suggest that lower transaction cost is beneficial. Reduction in transactions costs have been linked to direct cost savings, indirect benefits through improvements in agency costs, monitoring or coordination within existing organizations and markets, and even the creation of new types of market structures that are more efficient. In addition, economists like James Tobin, Joseph Stiglitz, and Laurence Summers already showed that higher transaction costs discourage destabilizing investors with short-run horizons while being less costly for stabilizing investors with long-run horizons; and most of our investors has short-term investment horizon. Also, lower transaction cost encourages investors to arbitrage away any existing market anomaly which ultimately improves market efficiency.
Researchers like Eugene F. Fama, argued that sophisticated investors will trade against less informed investors and will drive prices close to intrinsic values and will ultimately improve market efficiency.
The decision to increase BO account maintenance fee will mainly discourage small investors to participate in the stock market. Let's consider an example. Tk. 5000 is the minimum amount that an investor can invest in the market. For instance, a small investor makes 20% next year, i.e., Tk 1000 (which is highly unlikely!) on his investment of Tk 5000. Now, he needs to pay Tk 500 as BO account maintenance fee. Putting aside the possibility of loss and also other transaction costs, e.g., broker commission, this investor is only making Tk 500 or 10% on his investment. If he had kept the money in the bank, he would have earned more than 10 percent without any hassle. Why should an investor take the risk? So, with this decision to increase BO account maintenance fee, the SEC is ultimately discoursing small investors to participate in the marketplace!
However, institutional or high net worth investors would not be hampered at all. Does it mean that SEC is here only to save institutional or rich investors' interest? Some critics say that SEC increased this maintenance fee to deter fake BO accounts. Well, we now have national identity card to identify fake BO accounts. Increasing BO account maintenance fee will not help SEC prevent opening of fake BO accounts.
Currently, a prospective investor pays up to Tk 1,000 to open a BO account. The SEC should even put a bar on the ridiculously high BO account initiation fee charged by brokerage houses. Thus, not only SEC should reduce existing BO account maintenance fee, it should also need to cut BO account initiation fee.
The SEC is moving away from its goal of protecting investors' interest. In the developed countries, to decrease transaction costs, market participants are getting innovative every day. For example, leading brokerage houses have gone fully online and charge lower fees than before. When the whole world is trying to reduce transaction cost, our regulator is increasing it to make money. If the government truly wants to make money it should focus on reforming the tax system. SEC is a public institution and it is not supposed to act as a money making machine for the government. Rather than focusing on making money, SEC must stick to its goal of protecting investors' interest and also to increase market efficiency.
The writer is a student at Texas Tech University. He can be reached at E-mail :mainul.ahsan@ttu.edu