Online brokers: Penalties for illegal cross-border operations have been finalized, with fines lower than expected; Futu, UP Fintech (Tiger), and others will divest mainland clients over the next two years, entering an adjustment period where resilience will be key.

On May 22, the China Securities Regulatory Commission (CSRC), jointly with the Ministry of Industry and Information Technology, the Ministry of Public Security, the People's Bank of China, the State Administration for Market Regulation, the National Financial Regulatory Administration, the Cyberspace Administration of China, and the State Administration of Foreign Exchange, issued the 'Comprehensive Remediation Plan for Illegal Cross-Border Securities, Futures, and Fund Operations.' On the same day, administrative penalty pre-notifications were issued to Tiger Brokers, Futu, and Longbridge, along with their domestic and overseas entities. Futu is proposed to be fined RMB 1.85 billion, Tiger Brokers RMB 410 million (including confiscation of RMB 103 million in illegal gains), while Longbridge’s specific fine amount has not been disclosed. The three firms are alleged to have 'operated securities businesses without approval, engaged in unauthorized public fund distribution, and conducted unlicensed futures brokerage activities.' The remediation plan establishes a two-year concentrated rectification period, during which existing mainland investors will only be allowed to sell holdings and withdraw funds.

I. Fines lower than expected; two-year transition period to unwind approximately HKD 300 billion in AUM

The CSRC’s official penalty statement reads, 'Decided to confiscate all illegal gains from Tiger Brokers, Futu, Longbridge, and their related domestic and overseas entities, and impose strict penalties in accordance with the law.' However, the current fines appear relatively lenient—especially considering that IBKR and other smaller platforms were not included in this round of penalties. Interestingly, the CSRC’s statement specifically named Tiger Brokers before Futu.

According to company disclosures, 13% of Futu’s accounts are from mainland clients (approximately 440,000), representing roughly 20% of its total assets under management (AUM)—about HKD 250 billion. Tiger Brokers disclosed that mainland retail client assets in its consolidated accounts account for approximately 10% of its total client assets (and if including mainland clients who opened accounts via Tiger as an introducing broker with IB, the proportion of mainland clients would likely exceed that of Futu). The AUM corresponding to Tiger’s consolidated mainland client accounts is approximately HKD 48 billion. Longbridge’s mainland client base is smaller than those of the other two firms. Collectively, the three brokers are involved in unwinding more than HKD 300 billion in mainland client AUM.

Futu’s full-year 2025 revenue is projected at HK$22.5 billion. Assuming a 20% proportion and extrapolating based on past years, the potential fine could exceed HK$10 billion; however, the actual penalty imposed is significantly lower than this estimate. Moreover, the ratio of fines imposed on Futu and UP Fintech (Tiger Brokers) closely aligns with the proportion of their respective assets under management (AUM) tied to mainland clients, suggesting regulators may not have penalized mainland client activities conducted through Tiger’s accounts at Interactive Brokers (IB).

During the two-year transition period, mainland clients will only be allowed to sell, not buy—though the exact start date remains unknown. If such a mainland client also holds an IBKR account, whether they can transfer funds there to continue trading depends on banking transfer channels and IBKR’s level of cooperation with China’s latest regulatory measures. Currently, it appears that a portion of the HK$300 billion AUM invested in Hong Kong equities will flow back to the mainland and be redirected through Stock Connect mechanisms, which likely aligns with the original intent of this regulatory action.

After the transition period, Futu and Tiger’s apps may resemble currently compliant Hong Kong crypto exchanges (e.g., Hashkey), where access is blocked for users with mainland IP addresses.

II. Static financial impact on Futu estimated at 22–27%; long-term profitability hinges on U.S. equity markets and overseas expansion

Futu’s estimated static impact on 2025 profits:

Net trading commission income in 2025 is approximately HK$10 billion; a 20% reduction would amount to HK$2 billion. Assuming mainland clients are more active than overseas clients, the actual impact could be even greater.

Net interest income stands at HK$8.7 billion, primarily driven by margin lending interest, with a smaller portion from interest earned on idle client cash. However, since mainland client AUM will not fully withdraw during the two-year transition period, the impact will be less than 20%, or roughly HK$1.7 billion.

Futu’s other operating costs total approximately HK$6.4 billion, which could theoretically decline as well—though continued investment in overseas client acquisition will still be necessary.

Under a conservative estimate, the total pre-tax income impact would be in the range of HK$3.0–3.5 billion. Applying a 15% tax rate, the net profit impact would be approximately HK$2.5–3.0 billion, representing 22–27% of 2025 net profit. Additionally, the HK$1.85 billion fine accounts for 5% of HK$40 billion in shareholder equity.

Futu’s share price has declined by over 40% since early May. Based on static earnings impact alone, this appears to be an overreaction. In terms of valuation, the market previously projected 2026 net profit at approximately HK$12 billion; assuming discontinuation of services to mainland clients reduces net profit by roughly 25%, the revised forecast would be HK$9 billion. Following Friday’s sharp drop, the current market capitalization implies a P/E ratio of 11x—significantly discounted compared to IBKR and Robinhood, both trading above 35x P/E.

Previous articles have thoroughly explained the strong business model of online brokers. Although regulatory restrictions since 2022 have prevented Futu from opening accounts for mainland clients, the company has still achieved robust growth in Hong Kong and overseas markets. Historically, since becoming profitable in 2018, Futu has maintained year-over-year profit growth—even during bear markets.

Futu’s core customer base remains ethnic Chinese clients in Hong Kong and overseas regions—these clients are enthusiastic about stock trading and highly active. Of course, if Futu can successfully penetrate local customer segments in Southeast Asia and other regions in the future, it would significantly accelerate overall growth.

On the downside, this business exhibits strong beta characteristics. If, following a wave of mega IPOs in the U.S. market, the market quickly reverses into a bear phase, it would substantially impact online brokers’ profitability and customer acquisition efficiency.

III. During adjustment periods, resilience is tested—and valuations have room for re-rating

In his book 'Antifragile,' Taleb distinguishes three states: fragile = weakened by shocks, robust = unchanged by shocks, and antifragile = strengthened by shocks. The current wind-down of Futu’s mainland operations serves as a critical test to determine which of these categories the company truly belongs to. The author believes Futu has the potential to be antifragile.

3.1 Antifragility through international expansion: Regulatory tightening since 2022 as a catalyst

In December 2022, China’s securities regulator explicitly required Futu to rectify its operations and cease onboarding new mainland clients. At that time, market sentiment was just as pessimistic as it is today—narratives such as 'mainland clients are the core growth engine' and 'international prospects remain unproven' dominated. However, actual data from 2023 to 2025 has followed a completely different trajectory:

Mainland assets under management (AUM) declined from 40% of the total in 2023 to 20%, yet total AUM grew from approximately HK$420 billion to HK$1.23 trillion by the end of 2025.

Paid user growth exceeded 40% in both 2024 and 2025.

Futu solidified and expanded its leading position in the Hong Kong market—reaching one million paying clients in Hong Kong, capturing roughly 30% market share, with Hong Kong clients accounting for approximately 60% of total AUM and becoming the core contributor to profits.

Overseas paying clients outside Hong Kong account for 55% of the total. The moomoo brand has already launched in Singapore, Malaysia, the United States, Canada, Australia, Japan, and New Zealand.

In other words, the first regulatory shock did not weaken Futu; instead, it accelerated its international transformation.

3.2 Replicable market-entry methodology and high client stickiness

Geographic diversification alone does not constitute antifragility—it must also be demonstrated that this diversification is sustainable, replicable, and backed by a clear methodology.

The Singapore market validated this approach: using 'high-yield deposit alternatives' to tap into Singaporean residents’ savings habits, then funneling them toward equity trading through in-app investor education. Malaysia confirmed the model’s portability—its business growth rate and scale have already surpassed Singapore’s, with a larger total addressable market (TAM) thanks to its population base (34 million vs. Singapore’s 5.9 million). This product and customer acquisition strategy can now be extended to additional markets such as Thailand, South Korea, and Japan.

At the same time, Futu maintains a low account closure rate—once clients enter the ecosystem, they rarely churn. Once an overseas client base is established, it continuously attracts new accounts and ongoing client funding, creating a self-reinforcing business flywheel—a dynamic already clearly evident in Robinhood’s growing young customer segment.

3.3 Valuation antifragility: shifting the narrative from 'regulatory discount' to 'a compliant platform for global expansion'

The ultimate test of antifragility: can the shock event itself trigger a structural upward revision in valuation multiples?

Since stringent regulation began in 2022, Futu’s price-to-earnings (PE) multiple has remained in the 10–15x range, significantly discounted compared to peers like HOOD and IBKR. With the regulatory overhang regarding mainland clients now resolved—providing a clear two-year window to fully exit that segment—Futu can eliminate prior regulatory uncertainty, anchor itself firmly in its Hong Kong home market, and aggressively pursue overseas expansion. The author believes its valuation has room to converge toward that of comparable companies.

IV. Second-order effects of this event: liquidity impact, competitive landscape, and emerging opportunities

The withdrawal of HK$300 billion in mainland client funds will have limited impact on the broader Hong Kong or US equity markets (given that daily trading volumes in the Hong Kong market have recently reached HK$250–300 billion). However, it could exert pressure on less liquid Chinese ADRs and small-cap Hong Kong stocks with high retail ownership. From a game-theory perspective, if clients begin executing sell-only orders, this could trigger short-term overselling and sharp price declines in certain individual stocks. Meanwhile, Chinese ADR-listed companies may further accelerate their secondary listings in Hong Kong and seek inclusion in the Stock Connect program to access southbound capital liquidity.

It is uncertain how much of this HK$300 billion in offshore funds will flow back into mainland China, which could present business opportunities for other Hong Kong financial institutions (e.g., insurance, banking wealth management, real estate, etc.).

On the competitive front, attention should also be paid to the next moves by Yao Cai Securities, recently acquired by Ant Group, as customer competition in the Hong Kong market is likely to remain intense.

Additionally, with the compliant channels for mainland residents to invest in US equities further tightened, it remains worth watching whether demand for gray-market alternatives—such as on-chain US stock trading—will emerge. Previous articles have discussed the US push toward stock tokenization.

Summary:

The regulatory penalty announced on May 22 marks the conclusion of a three-and-a-half-year cross-border compliance overhaul for internet brokers, with the fine amount lower than initially expected. From a static financial impact perspective, the market reaction—Futu’s share price decline since early May—appears overdone relative to the actual impact: a net profit hit of 22–27% and a shareholder equity penalty of roughly 5%. Dynamically, however, the 2022 regulatory episode already demonstrated Futu’s antifragile qualities—its ability to emerge stronger from shocks—as evidenced by its mainland AUM share steadily declining while total AUM nearly tripled, paying clients grew over 40% annually for two consecutive years, Hong Kong market share climbed to 30%, and overseas clients now account for more than 55% of its user base.

The current valuation at 11x P/E reflects the shock of an unexpected regulatory penalty. However, upon closer reflection, the actual imposition of the penalty—the 'shoe dropping'—may itself catalyze a valuation rebound: regulatory uncertainty has now been resolved, the company can focus on overseas expansion, and its narrative is shifting from 'China-focused cross-border broker' to 'global compliant platform.' Over the two-year transition period for fund withdrawals, key focal points for Futu include further expanding its market share in its Hong Kong home base, the pace of replication and expansion across multiple overseas markets, and the sustainability of the US equity bull market.

Whenever the industry faces major shocks, those who safely navigate the cycle and rise from the ashes inevitably emerge even stronger.

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