Spare a thought for the poor stockbrokers of the world!
While we are unlikely to see a Salvation Army Stockbrokers’ Appeal, things are fairly dire and the industry appears destined for another round of rationalisation, save a dramatic and surprise turnaround in global markets.
Australia is overserviced for a start. There is a surfeit of brokers and investment bankers, and client demand has been slaughtered by the ravages of the sovereign debt crisis and fears of economic contraction.
The broking industry has already had to brave the chill winds of online competition from the likes of discount brokers CommSec and E*Trade.
Then came the financial crisis, the greatest disruption to markets and wealth creation since the Wall Street Crash of 1929 and the ensuing Great Depression.
After a ”false dawn” – a two-year rebound in what looked, for a while, like the return of the bull-market – came the sovereign debt crisis.
It has been a rough trot indeed. Client holdings have been blown to smithereens, volumes are down, and sentiment has been shattered.
The corollary of this destruction in market confidence is the decline of corporate transactions. As if all this were not enough, stockbrokers have had to put up with the incursion of those buccaneering contracts-for-difference (CFD) providers preying on their biggest punters.
The trend for many an embattled broker, whose clients are now sitting it out, either blown up or waiting for the volatility to subside, is to do more trading themselves.
One of the great privileges, and perils, of being a stockbroker is that you get to have a good old-fashioned, red-blooded, no-holds-barred punt at work.
Phoning clients and inveigling them into buying or selling shares might be the main job of a client adviser, or ”dealer” as they are dubbed in the industry, but the temptation to trade can be hard to resist.
After all, there’s a stock exchange trading screen right in front you. And lately, with volatility spiralling and anxious clients stuck on the sidelines, stockbroker ”PA” (personal account) trading is on the rise.
”It’s brutal out there,” one broker said yesterday. ”Turnover in private client firms must be down 50 per cent.” And client casualties are rising – as usual in areas where the most market leverage resides. If the war stories of the past two weeks are a guide, the bulk of the pain has come, not surprisingly, in the highly leveraged CFD market.
Two morning sessions – last Tuesday before the 10 per cent bounce that began at lunchtime and the Friday before last – proved the most savage.
Besides the spate of margin calls reported on those days, what has gone unreported is the number of clients who have been ”stopped out” of their positions over the past couple of weeks.
And unlike a margin call on shares, where the owner gets notified and invited to tip in some more money within a specified period, a CFD punter simply gets ”stopped out” straight away as the underlying shares hedging the position are liquidated.
With few client orders to fulfil and plenty of volatility to trade, some brokers and traders were quick to exploit the surprise bounce in the market last Tuesday, their profit often coming at the expense of forced sellers.
Yet the number of casualties among the broking fraternity itself will be down on past years due to tighter industry compliance.
Until recently, as brokers did not need to settle a trade for three days under the T+3 (transaction plus three days) payment rules, they could punt to their heart’s content without actually forking out any money – as long as the stock was sold within three days.
Such were the temptations to trade that there would be few brokers who could boast they had survived the crashes of 1987, 1989, the Asian turmoil of 1998, the dotcom bust of 2001 and the global financial crisis of 2008 without ”blowing up”.
But with internal compliance now requiring brokers to actually pay for the shares just as clients do, and many firms needing staff to hold stock for at least a month, the scope for a rogue trader to take the company down with him has been radically reduced.