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Tencent alumnus aims to turn Futu into China's Charles Schwab, even as it lands in Robinhood's 'Nerd vs Wall Street' battle

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Iris Ouyang iris.ouyang@scmp.com
·10 min read
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In late January, when the "Nerds vs Wall Street" battle was at its most intense on the New York Stock Exchange, one of China's most promising technology entrepreneurs was catching very few winks 13 hours away in Shenzhen.

Li Hua, who also goes by "Leaf", personally negotiated with his dealers in the United States to unfreeze transactions so that customers of Futu Holdings' internet-only trading platform in mainland China and Hong Kong could join in the chase for the shares of GameStop, an unprofitable retailer of speciality electronic games in Grapevine, Texas.

The GameStop mania wiped out US$27 billion of value in a boom-to-bust cycle in less than a month. It dragged Futu into the limelight along with the largest no-commission online broker Robinhood, when Li's customers were barred from buying additional shares in GameStop and AMC Entertainment Holdings. Even though the suspension was eased within 24 hours, the episode drew an uncomfortable comparison with Robinhood, which sells customers' online orders to high-frequency brokers or market makers like Citadel Securities. Li, founder of Futu, had envisioned creating China's Charles Schwab when he established the online broker in 2012.

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"We are not like [Robinhood] because they sell order flows in exchange for letting customers trade for free," Li said in an interview with South China Morning Post in Shenzhen. "That's not a business [model] that we are getting involved in, at least for now."

Futu Holdings founder and chairman Leaf Li Hua poses for a picture at the company's head office in Shenzhen on December 9, 2020. Photo: Iris Ouyang

Futu is the biggest in a new crop of stockbrokers in China that exist 100 per cent online, eschewing the type of bricks-and-mortar trading halls and viewing galleries frequented by the nation's legions of pensioner investors. The number of China's share-trading accounts ballooned to 178 million in December, according to China Securities Depository and Clearing Corporation, making this the world's eighth-largest cluster of people behind Nigeria's population.

"Online stock trading in China topped the world in 2018 with 31 per cent of the market, showing the steadily rising demand of investors using online channels for their transactions," according to First Shanghai Securities' analyst Li Jinglin, in a January 22 report. "Compared with traditional brokerages with bricks-and-mortar shops, online brokers that focus on online trading have improved efficiency, relatively lower commission rates and fees after they cut their overheads, and they are better able to win over loyal customers with their cost advantage."

Headquarter of Futu Holdings in Shenzhen on December 9, 2020. Photo: Iris Ouyang

Comprising mostly millennials who came of age in 2000 or even some Gen Z traders born in the 21st century, these young customers prefer simple, do-it-yourself systems that let them trade from the convenience of their ubiquitous smartphones. Lower transaction fees were also a big plus, encouraging more traders to get in and out of positions more frequently, even with smaller wins.

"The simplicity of our service enables us to cater to all levels of customers, whether they are beginners, or experienced investors who require more in-depth features and analysis," Li said at his head office on Yuehai Street, one of China's wealthiest neighbourhoods measured by gross domestic product.

The street, cutting through the Nanshan district in the heart of what is dubbed "China's Silicon Valley," is the marquee address for the technology industry, home to such home-grown champions as Huawei Technologies, ZTE, Tencent Holdings and the drone maker DJI.

A night view of Nanshan district in Shenzhen, with Tencent Holdings' building in the centre, on October 7, 2020. Photo: Xinhua

The simplicity of the model served Li well, helping Futu chalk up 10.4 million user accounts as of September 30, 10 times larger than Tiger Brokers - backed by one of China's largest smartphone makers Xiaomi - with 1 million user accounts at the end of November.

Futu's commission is 0.05 per cent, with the minimum amount set at HK$50 (US$6.4) except for new users in certain periods, compared with 0.03 per cent in commission fees plus 0.03 per cent platform fees by Tiger Brokers, and 0.25 per cent by Huatai International with a minimum amount of HK$100.

A decade earlier, when Li had just struck out on his own, stockbroking was a different business. Dominated by brokerages affiliated with large state-owned banks, the industry was a tightly regulated market heavily ring-fenced by rules to damp price swings, prevent capital flight and provide the population a one-way bet for ever higher prices.

It was also a business that was in no rush to innovate. Investors domiciled in mainland China, collectively sitting on the world's largest currency reserves, had few avenues for trading offshore due to the nation's tightly controlled capital accounts. Until a cross-border investment channel called the Connect was established with Hong Kong in 2014, they could not trade any of the Chinese companies listed on the city's exchange, from state companies such as China Mobile Limited to tech champions such as Tencent. Trading of US-listed stocks was off-limits.

Such was the market situation that drew Li, who turns 44 this year, to abandon a promising career in what would become China's most valuable company to strike out on his own.

Li, who studied computer science, joined Tencent in 2000, two years after graduating from Hunan University in central China. His English name Leaf is a homophone of his Chinese name in his native Changsha dialect.

Joining the then start-up, Li worked alongside Tencent's founder Pony Ma Huateng, helping to develop the QQ messaging service that helped to connect people from far-flung regions around China. QQ, still in use today by 600 million active users every month, would turn out to be one of Tencent's most successful products. After two years of working on QQ, Li was promoted to head a division at Tencent charged with creating video content.

Tencent went public in 2004, raising HK$1.79 billion in an initial public offering on the Hong Kong stock exchange. The company's shares have jumped almost 200 times since going public, valuing Tencent at HK$7.08 trillion as the sixth-largest publicly traded company on earth.

As a middle-ranking manager and one of the earliest employees - he was staff No. 18 - Li was rewarded with share options that turned into instant wealth. Tencent's listing in Hong Kong also gave Li an early peek at how the stock market worked, giving him first-hand experience of investing across different currencies and markets, as well as having to navigate different regulatory requirements.

Frustrated with the prevailing stockbrokerage services that were cumbersome, expensive and inefficient, Li struck out to develop his own trading platform. He wanted to create a Chinese version of Charles Schwab, the pioneer of electronic trading platforms, discount brokers and no-fee trading that is now the world's third-largest asset manager behind BlackRock and Vanguard.

He left Tencent in 2008 to focus on his venture, picking the date - four days after Valentine's Day - of his eighth anniversary as his last day at the company, according to his blog. He had not even told his parents about his resignation, causing them to wonder if he had been fired for misconduct, he wrote.

The early days were hard, as he struggled to raise capital and to navigate the underdeveloped market for online stockbroking.

"If I was given another chance, I may not choose to start my own business," Li said. "That's not to say I regret becoming an entrepreneur, but many things were far more difficult than I originally thought."

Three years would go by, before his product was ready to launch. For Futu to progress from vision to reality, Li said he had Tencent to thank, both for eight years of working in one of China's largest technology companies, and for its financial backing.

The viewing gallery of a typical stockbroking firm in Shanghai on August 2, 2019. Contrary to global conventions, China uses green to denote losses and declines, using red colour to represent gains and advances. Photo: EPA-EFE

"Most people lack the ability to believe, especially the ability to believe in the future ... Many people believe it after they see it happen," he said, adding that his experience at Tencent made it "very easy" for him to believe the future.

Tencent also became one of the earliest investors in Li's start-up. China's largest publicly traded company is now Futu's second-largest shareholder, owning 18.9 per cent of its class A shares an 25.9 per cent of Class B shares.

Futu is the largest of a new crop of online brokerages that embraced the constantly changing needs of their users. Besides Xiaomi-backed Tiger Brokers, Ant Group - an affiliate of this newspaper's owner Alibaba Group Holding - also has an investment in Snowball Securities.

Online brokers have disrupted the traditional brokerage segment over the years, benefiting from a surge in direct financing. China recorded double-digit growth in the number of securities apps users between December 2016 and July 2020, according to iMedia Research.

SCMP Graphics

Fintech institutions - those technology behemoths that are venturing into financial services, like Ant Group, Xiaomi and Tencent itself - will record a bigger growth as the trading volume of global capital markets grows, while people increasingly accept online trading amid technology development, said First Securities' Li.

A lower growth of new users, lower-than-expected market activities and possibly tighter regulation could pose risks for Futu, the analyst said.

"Online brokers have the advantage in costs, so traditional brokers will lose their competence if they don't diversify their businesses," Futu's founder said. "Their brand franchise, experience and the accumulation of human relations should be what they must focus on."

Futu now employs more than 1,300 around the world. Its stock has risen 15-fold since its 2019 initial public offering in New York, valuing the company at US$24.5 billion, about a fifth the capitalisation of Charles Schwab, founded half a century ago in 1971. The company's own fund, Futu Money Plus, managed more than HK$10 billion in capital at the end of 2020.

GameStop's journey from boom to bust took less than a month. SCMP Graphics

The company is making a push into the Singapore, using the country as its stepping stone to tap Southeast Asia, allowing Chinese investors to trade the region's stocks.

Futu's growth has turned Li into China's 66th-weathiest billionaire, according to Bloomberg, estimating his fortunes at US$9.3 billion through a 40-per cent stake in Futu, making him the stockbroking industry's 11th-richest broker.

Recriminations continue in the United States over the GameStop mania, with Robinhood's 34-year-old chief executive Vlad Tenev being called to testify to the US Congress this week about the temporary trading restriction placed on the stock. Thankfully for Li, Futu is spared the scrutiny.

"Futu is actively communicating with upstream channels to enhance trading channel capacity," Li said two weeks ago when the Chinese broker had to follow its US dealers in restricting transactions, adding that the company will continue to vet new customers before opening accounts and increase risk alerts to users. "We are also planning a new round of capacity expansion in the Hong Kong market to ensure customers' orders are processed quickly and smoothly."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.