The Markets=20 Jacques Magliolo=20
Stockbrokers are slow to accept change and nothing=20 upsets them more than when their old boys’ club is=20 interfered with. =20
Now, only seven months after being forced to allow=20 institutions to become corporate members of the=20 exchange, the realisation that they have no choice and=20 no way out is finally sinking in.=20
The world of the stockbrokers is changing and, while=20 there is no panic in evidence, some are embracing the=20 coming new order with a fervour not often seen at the=20
There is no doubt that it is dangerous to underestimate=20 stockbrokers’ ability to adapt. The stock exchange has=20 been around since 1887 and has seen famine, world wars,=20 concentration camps in South Africa, crippling=20 international sanctions, political and business scandals=20 galore, violence and strikes.=20
The bottom line is simple: a change in the structure of=20 the JSE, including automated trading, means a change in=20 emphasis of income. In the past there were a few methods=20 available to generate revenue, namely commissions from=20 trading financial securities for the public and=20 institutional clients, portfolio management and=20 corporate finance.=20
Now, if institutions become members of the exchange,=20 they will be able to directly trade securities and thus=20 bypass stockbrokers. If stockbrokers wish to keep their=20 independence, while maintaining income , they have few=20
Immediately, they would have to beef up their private=20 client and corporate finance departments, to offset loss=20 of commission income from institutions. While these have=20 been improved and strengthened over the past year,=20 stockbrokers have a number of other options:=20
* Stockbrokers could swallow their pride and sell a=20 portion of the firm to an institution or an overseas=20 stockbroker or bank. Last year saw a number of local=20 stockbrokers go this route: Davis Borkum Hare merged=20 with Smith Newcourt, Ivor Jones, Roy (SG Warburg) and=20 Simpson McKie (James Capel).=20
After all, these deals have made partners in these firms=20 very wealthy. Take Simpson McKie’s deal with United=20 Kingdom-based James Capel: a director of the firm said=20 that, based on a price:earnings ratio of eight times,=20 the five equity partners received nearly R15-million=20 each for the 51 percent share of the firm.=20
However, in diversifying offshore the local boys=20 suddenly learned that it is never easy to have a master=20 who dictates how to run your company. =20
Insiders at Davis Borkum Hare say that their merger has=20 not been smooth. Smith Newcourt has complained about the=20 “lack of depth =20
of South African research … unable to use overseas …=20 too parochial”. says an insider, adding that “it’s=20 difficult to write longer reports, when we’ve being used=20 to churning out two to three page analytical pieces”.=20
* Stockbrokers could give up their status and simply=20 broker deals for institutions. While this may sound=20 improbable, it may be the only way in which the smaller=20 broking firms will be able to survive under the new,=20 faster, automated trading system.=20
It is common knowledge among stock market experts that=20 one-man operations could become fronts for some banks,=20 especially as market indications are that banking=20 licences will become more readily available in future.=20
Ultimately smaller banks can avoid direct competition=20 with the Old Mutuals and having to buy expensive=20 corporate membership of the JSE. It would be easier to=20 make a deal with a stockbroker, whereby the stockbroker=20 would deal exclusively for that bank.=20
* Operations could be streamlined. Any way one looks at=20 this, it means downsizing operations, either cutting=20 administrative and clerical staff or by merging with=20 another local stockbroker. This is especially true in=20 the light of massive rationalisation policies carried=20 out in 1990.=20
In that year no profession was spared the retrenchment=20 knife in South Africa, from senior banking economists to=20 stockbrokers (forced into early retirement) and=20 analysts. Many now fear a repeat of 1990 in November.=20
* Stockbrokers could either sell research directly for=20 cash or for being allocated a portion of institutional=20 funds to invest. This is the way America is heading and=20 it could be a viable option in South Africa.=20
In fact, the volume of stockbrokers who are trying to=20 headhunt analysts indicates a contrary notion to that of=20 possible retrenchments.=20
* Stockbrokers could trade for themselves. Instead of=20 trading for clients, stockbrokers could decide to buy=20 and sell securities for the firm and reap a direct=20 benefit of their skills.=20
This would only be possible under a dual capacity=20 system, which is as yet not part of the JSE.=20