Stock brokerage house: In a narrowing road, one broker sees room

Over the years, compliance costs and regulations have driven smaller players out of business

KARACHI: McLeod Road is no more welcoming if you run a small stock brokerage house with limited capital to go around with.

The brokerage industry has undergone a transformation in the last couple of years: from a money-minting business, it has turned largely into a loss-making enterprise for most of the smaller players.

Thanks to stringent regulations introduced recently by the Securities and Exchange Commission of Pakistan (SECP), compliance costs have gone up substantially, making the survival of small fish difficult.

On the one hand, the once-prized Trading Right Entitlement Certificate (TREC), which is the broking licence required to act as an intermediary on the Pakistan Stock Exchange (PSX), has shed most of its monetary value following the merger of Lahore and Islamabad stock exchanges with the Karachi bourse. Non-Karachi brokers became TREC holders on the unified stock exchange, which ended the exclusivity of the 200-member group of Karachi-based brokers while doubling the number of brokers to around 400.

On the other hand, the SECP enhanced compliance and auditing requirements while demanding complete separation of clients’ assets from the brokerage house’s own assets as well as mandatory certifications for staff members.

As a result, as many as eight brokers have “surrendered” their TRECs in the last couple of months alone.



However, all the doom and gloom could not stop Zubair Ghulam Hussain from setting up his own brokerage house two months ago.

With 14 years of brokerage experience at KASB Securities and Foundation Securities, Hussain acquired the TREC of then-dormant Pardesi Securities two years ago. The brokerage house commenced commercial operations in April under the name of Insight Securities. Hussain serves as CEO and controls 42% shareholding while his mother owns the rest of 58% stake in the newly established brokerage business.

Speaking to The Express Tribune in a recent interview, Hussain said he bought a dormant TREC and rebranded it instead of acquiring an established house in order to shield himself against any pending litigation.

“Brokers are surrendering their TRECs for free. That’s because anybody who buys a TREC is also supposed to accept all liabilities for the next two years,” he said, adding that at least two among the most prominent brokerages are currently up for grabs.

“There is practically no brokerage house that isn’t facing litigation. Some brokerages have a litigation of size that is twice the worth of the company itself,” he said.

As for the sudden increase in the number of brokers on the PSX, Hussain said surging compliance costs will soon put a majority of current players out of business.

“Earlier, a team of a few people would run a brokerage from a small, one-room office. Now you have got to have a separate compliance officer, settlement officer and head of operations with all relevant certifications,” he said.

In addition, brokers are now supposed to submit biweekly an assets segregation report besides dealing extensively with a number of authorities like the Employees’ Old-age Benefits Institute, Sindh Revenue Board, Federal Board of Revenue, SECP, Central Depository Company etc on a daily basis, he said. “It all adds into the cost of doing business,” he said.

Similarly, a broker would use the assets of clients, like cash and securities, as recently as a decade ago. But the regulator banned the brokers’ use of clients’ securities three years ago and clients’ cash one year ago. “The level of compliance he regulator is seeking doesn’t make commercial sense for small players that operate on low volumes,” he noted.

“People in the brokerage industry are tired. Many are closing, many are surrendering their licences. I think not more than 60 players will survive three years down the road,” he said, adding that broking does not offer more than 10%-15% return on equity (ROE) and that too in the case where the scale is available.



The motivation

So why did he decide to enter a business at such a bad time?

“When you have spent some time in an industry, you know how efficiency can be increased and bottlenecks removed. When some players leave, there is always space for new players,” he said on an optimistic note.

Insight Securities is starting off with financial muscle to survive paper-thin margins. Its paid-up capital will soon be increased to Rs140 million. His long-term relationships with local and institutional clients will ensure a steady stream of equity business, he said.

“My expertise has always been foreign and local institutions. That is why we have already got some of the biggest institutional clients – such as HBL, MCB Bank, Adamjee Insurance, NAFA, MCB-AH AMC, UBL Funds, ABL AMC and JS Investments – on our panel within two months of operations,” he said.

Saying that only six to eight brokerage houses invest in research, Hussain noted that Insight Securities will have a focus on producing first-rate equity research and will have six people on its research desk by the end of next month.

“We don’t have a proprietary book,” he said while referring to stock trading that many brokerages do to make money for themselves. “There is no plan to start it in the near future either. But let me say it out loud: without proprietary trading, this business doesn’t generate enough ROE to survive on pure agency broking.”

The writer is a staff correspondent 

Published in The Express Tribune, July 11^th, 2016.

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