With clients on the sidelines, tougher regulations are limiting the risk of rogue traders.
SPARE a thought for the poor stockbrokers of the world. OK, so we are unlikely to see a Salvation Army Stockbrokers Appeal. It’s not that bad, but things are fairly dire and the industry would appear 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 in the good times. Lately, client demand has been slaughtered by the ravages of the sovereign debt crisis and fears of economic contraction.
Already, the broking industry has braved the chill winds of online competition from the likes of discount brokers Commsec and ETrade.
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 demoralising ”false dawn” – a two-year rebound in what looked, for a while, like the return of the bull market – came the sovereign debt crisis. And let’s not forget the onset of the extreme volatility from the tsunami hitting Japan five months ago.
It has been a rough trot indeed. Clients have been blown to smithereens, volumes are down, sentiment has been shattered.
The corollary of this destruction in market confidence is the decline of corporate transactions.
Capital raisings have slowed to a trickle, mergers and acquisitions are few and far between. As if all that weren’t enough, the stockbrokers have to put up with the incursion of those buccaneering 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 great 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. It’s just a key stroke away. And lately, with volatility spiralling and anxious clients stuck on the sidelines, stockbroker ”PA” trading is on the rise, that is trading on the personal account.
”It’s brutal out there,” said one broker yesterday. ”Turnover in private client firms must be down 50 per cent.”
The client casualties too are rising – and as usual in the spots 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 in the CFD market, just where you would expect, just where the most leverage resides.
Two morning sessions last Tuesday – before the 10 per cent bounce that kicked off at lunchtime – and the Friday before last, were the most savage.
Besides the spate of margin calls on those days, as reported, what has gone unreported is the number of clients who were ”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 in 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 fast to exploit the surprise bounce in the market last Tuesday, their profit coming often at the expense of forced sellers.
Yet the number of casualties among the broking fraternity itself will be down on past years since industry compliance has tightened up.
Until recently, as brokers didn’t 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, that is.
And such are the temptations to trade that there would be few brokers who could boast they had survived the crashes of 1987, 1989, the Asian crisis of 1998, the dotcom bust of 2001 and the GFC of 2008 without ”blowing up”.
But these days, as internal compliance requires the brokers to actually pay for the stock like the clients – and as many firms have a requirement for their staff to hold stock for a month – the scope for a rogue trader to take the firm down with him has been radically reduced.