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Stockbrokers face major shakeout

Last year when Indian stockmarkets were at dizzying heights, broker Vinod Bansal had to move two extra sofas into his office to accommodate the flood of day traders.

Now his brokerage is out of business on the back of a domestic share-price rigging scandal in March and a global stockmarket retreat that sent investors scurrying for the exits and trading volumes plunging.

Bansal is just one of a number of casualties market watchers expect in the months ahead as the broker community undergoes a major shakeout.

"The feedback we get is that eventually a total of 300 to 400 well-capitalised broking outfits will emerge by end of the next two years," said Sanjay Dutt, head of Quantum Securities, a mid-sized firm with retail and institutional clients.

That would be a dramatic fall from the 743 equity trading members of the National Stock Exchange and 604 members of the Bombay Stock Exchange. The figures reflect some overlap.

"A year ago when the markets were high we had 100 clients trading almost daily but when I closed there were barely a couple of orders in a week," says Bansal, who was a broker at the National Stock Exchange, India's largest bourse.

Some brokerages report activity is down by as much as 75 percent from early 2001 as investors stay out of the market.

"Huge losses at the retail level are the single biggest factor for volumes coming down by 75 percent from early 2001," said Ajay Kejriwal, director of Jet Age Securities.

Trading volumes on the NSE -- India's largest exchange -- hit a high of Rs 103.66 billion on February 28 when a market-friendly budget was announced and averaged between Rs 70-80 billion a day that month.

But since then, NSE volumes have dived to less than a third in wake of allegations in March of price manipulation, exchange figures show. The scandal triggered a domestic share price slide that was greased by the global bearish investment climate.

Business has slumped

"Business is really bad. Compared to early 2000 it's down to a quarter and compared to early 2001, it's half if not one-third for most brokers," said a broker who owns a mid-sized firm.

"Turnover has fallen considerably as the markets undergo a major transformation," a BSE official said, declining further comment. An NSE official said there had been a rise in small brokerages cancelling trading terminals in April and May but the same trend was not seen in June. No figures were given.

A regulatory ban on the century-old carry-forward system to curb the rampant speculation that led to the market crash went into effect this month, piling further pressure on volumes.

The carry-forward or 'badla' system which allowed speculators to take huge positions by paying margin money accounted for 90 per cent of volume on India's 23 exchanges. Now trade in the most liquid shares has been shifted to a daily rolling settlement.

In an effort to boost liquidity following the 'badla' ban, the market regulator allowed options trading. But brokers still are coming to grips with how options work and they say capital requirements for options trading will exclude weaker players.

"Investors will need to learn about these new trading techniques and get used to them before they enter the markets in a big way -- if at all," said a dealer.

The first victims of the changed landscape are expected to be small mom-and-pop broking units. "These will be marginalised due to loss of trading business and then by actual losses in the markets in the next six-to-12 months," Dutt said. He added even mid-sized firms such as his would need to rethink strategy.

"Mid-sized broking houses will be compelled to seriously think of merging and consolidating their businesses," he said.

The key to survival for many brokers will be their ability to shift revenue streams to advisory hand-holding of retail and high net-worth individuals from pure vanilla trade commissions.

"The key is to provide that extra knowledge of new trading systems to clients," said Dutt.

"Professional expertise and knowledge is going to be at a premium in the changed trading environment," said Bansal, who has joined a well capitalised broking firm. "We're increasingly going to see marriages of capital and professional expertise."

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