Why brokerages prefer proprietary trading over winning new clients
MUMBAI: Paterson Securities has seen better days in its 123 years of existence. The waiting room of this Chennai-based stock broking firm has played host to several luminaries of the past - from officials of the Raj who wanted to place trades on London bourse to the Travancore Maharaja who wanted to sell some pharma shares, the decorated general who held a few Tata Group stocks and a former President of India who liked to dabble in stocks.
But days such as those do not exist anymore. It's not that Paterson does not enjoy the patronage of the rich and mighty; they still spent a lot of time chasing rich investors in and around Chennai. It's the mass-retail that Paterson is not really keen to add.
"It has become very difficult to run successful mass-retail offline models. The more clients you have, the more losses you'd make if you only have an offline delivery model," says M Amarnath, CEO of Paterson Securities, which even now has over 10,000 clients. "We're focusing more on HNI and wealth clients these days... Until some years ago, we didn't have a proprietary trading book. Now we run an active prop desk. Prop trading rings in 25% of our overall revenues," adds Amarnath.
Several brokers, such as Paterson Securities, have changed their tacks to stay afloat in a highly competitive business. For many of them, the game no longer lies in conventional business model — where they execute trades for clients for a fee. These days they are putting their skills to make money for themselves. As per NSE scrolls, over 52% of equity derivative trades are logged by proprietary traders, and most of it using index options. Proprietary books exposure to cash segment is about 20% vis-a-vis 24% by FIIs and 9% each by corporates and domestic institutional investors.
Prominent brokers such as Adroit Stock Broking, Edelweiss Financial, Globe Securities, SMC, Dolat Capital, BLB Securities and B&K, among others, have beefed up their proprietary books to ring in more revenues. Brokers are rumoured to have proprietary trading books worth.`100-800 crore. Profitability of this segment has prompted several brokers to shut their doors on retail investors.
"Most brokers housed in the BSE towers sustain themselves doing proprietary online trading. These are brokers who did not change their business models with changing times. When retail investors bowed away post the 2008 crash, these brokers had no option but to trade for themselves," says Alok Churiwala of BSE Brokers Forum.
The influx of large retail brokers with online capabilities, low retail investor participation, regulatory tangles and higher investor servicing cost have prompted brokers to rely more on proprietary trading. Easier bank funding (enjoyed only by a select few) has also encouraged brokers to expand their proprietary books.
Tags : online trading, online share market, online trading india, online stock market, online trading companies
Source from : http://articles.economictimes.indiatimes.com/2015-...