Why big brokers shun small retail

One of the arguements is that delivery trades in cash markets have gone down substantially

Stock brokers are one of the most evolved species. They know things even as they happen and sometimes  when they are about to happen. They have an opinion on everything. If I were to pick someone to talk me out of a deathtrap, I would choose a stock broker.

Why then, are such smart people going out of business suddenly? And, why would a company which, for a decade and a half, promoted equity to build a million-strong cult suddenly ask these people to sell their shares and opt for bonds and other boring stuff?

Let us put some of the arguments to test. First, delivery trades in the cash markets have gone down substantially. This is true. Brokers make money, irrespective of the profit or loss to clients. But when the broader market trades up or down without any conviction, the small guy doesn’t have the confidence to sell; nor does he have the risk appetite to deploy new capital and buy. Without buying or selling, brokers’ coffers go empty.

But is it not a typical bear market phenomenon? Would it not turn around when the cycle becomes bullish? Should we assume this is a tactical move, not a long-term strategy?

Even the argument that the move could be aimed at addressing the Reserve Bank of India’s concerns in the run-up to new bank licences do not hold much water, as many private banks are major players in retail booking.

Some brokers have indicated retail broking has become a ‘high-cost’ venture. What high cost? Most big brokers with large nationwide networks operate through the franchise model, in which most fixed overheads are borne by the franchisee. Also, staff costs have not risen significantly. In fact, many top brokerages have cut staff strength in the post-2008 carnage period. Whatever addition is happening is in advisory, lending and other new businesses. Nobody’s even talking of bonuses, well into the Diwali week.

But there is one area in which costs would definitely rise — investor grievances. Late last month, the market regulator had put in place a new mechanism to settle disputes between brokers and investors. Such disputes largely relate to unauthorised trades in accounts of investors. These are frustrating and never-ending disputes, in which the broker and investor trade allegations. While an investor says the broker traded in his account without his authorisation and was now asking him to bear the losses, the broker argues the investor first authorised the trade, but retracted when these resulted in losses. Earlier, the liability of the broker arose only if he lost in the exchange arbitration.

The new mechanism requires the broker to pay a part of the disputed amount before going for arbitration, for disputes involving amounts of up to Rs 10 lakh. At the higher end, such as advisory, such execution-related complaints are lower. At the small retail level, however, brokers fear this would open a Pandora’s box. The promise of monetary compensation would encourage more disputes and litigation. Earlier, brokers were considering moving towards the advisory model; the September thunderbolt seems to have made it a no-brainer.

Like I said, stock brokers are smart people. They see what is coming.