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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » What brokers would not want you to know

What brokers would not want you to know

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1What brokers would not want you to know Empty What brokers would not want you to know Thu Aug 04, 2011 12:01 am

insidertrader


Manager - Equity Analytics
Manager - Equity Analytics
Is the market downturn due to credit clearance and not allowing brokers to give credit?
Excessive credit clearance has been relaxed again and again for more than a year now. 50% of the credit was supposedly cleared on March. SEC is supposedly getting reports from the brokers so that it doesn't grow over 50% after that.
Brokers have been generating massive profits in the last few years through broker charges as well as through credit interest. Even some brokers are giving margin accounts for retail traders for some time now. SEC has already let brokers give credit when they have specific controlled financial systems in place separately.
Is this a beggar's wound (higannage thuwalaya) used by brokers to ignore the laws of a civilized stock market? The reason CSE formed a bubble was due to brokers ignoring the laws and the SEC not actively enforcing them from the beginning. Now SEC has somewhat actively enforcing the law. But brokers want to go back to lawless old times. So that they can do whatever they want to make massive profits just like old times.

Why do brokers give credit for customers who defaulted their payments in the past again and again? Any financial institution would not give loans to customers if they have not paid their past loans on time. No mudalali will give goods on credit if the customer has not paid dues on time. But why do brokers play with the laws force selling shares saying it's the SEC's fault and letting the customers buy back the same shares on credit again?

If you look at the stock market performance in the last 12 or so months, only times it went up were when something changed in the credit clearance. When the credit clearance gets relaxed market goes up. When the credit clearance dead line ends market goes up. It was like credit clearance giving the market a reason to go up when it's heading south for sometime now.

It is not the retail traders who will benefit from relaxing the credit. Not the big investors. It'll only benefit the brokers. They will find new means to make more profit. Big investors are already getting all the credit they want from banks and financial institutions at lower interest rates and in their terms under different labels. That is how these HNWI trade. Retail investors they have to pay the high broker commission charges which is about 2.5% both ways as well as the credit interest which all could add up to sometimes 20% or more. Retail investors already get this through controlled margin accounts through broker companies and banks. (There was a rumor a proposal came to lower the broker charges at the meetings but was cut short as the brokers were not happy to even discuss that.) To make a profit the retail traders have to expect a huge price increase. Only bubbles can make that sort of price appreciation. I believe it was this kind of price bubble we experienced in the in beginning of this year just after retail traders got credit from brokers and banks etc through margin accounts. To make a profit the price had to appreciate more and more.

I think this brokers getting more relaxed terms for issuing credit will not stop the share market going down. It can do something temporarily when some announcement ever comes. But this won't benefit the investors it's just that we're creating more ways to contribute to the profits of the broker. Retail traders even buying on more credit cannot make difference in the share market. Only they can do is push up a single counter for few days. As I said before brokers are already giving credit through controlled means by establishing separate entities. Broker credit is already there. It's nothing new.

These days many lament over 'fundamentals are going down'. They have to if they're overvalued. If a company is a well established and profitable doesn't make it a fundamentally strong company. It has to be fairly valued. Only speculative stocks, questionable companies can go at very high PE ratios of 30, 40, 50, 100. Today most of the shares which people label as 'fundamentally strong shares' are actually 'speculative stocks' - sky rocketed due to future expectations. 'muhudata hath gawwak thiyeddi amude gahuwa wage'

That's enough for now. If you come this far thank you for reading my ramblings.



Last edited by insidertrader on Thu Aug 04, 2011 12:37 am; edited 1 time in total

Tiger

Tiger
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Totally agree ...+rep

Academic


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Thanks for expressing the truth. We had to walk a long way to it. Feel I'm not alone! See my comments here that align with you.

http://forum.srilankaequity.com/t7677p25-it-is-time-to-change-our-attitudes

Agreed! If no new credit, no T+5 forced-selling. I can't understand why brokers say T+5 is the reason for market down, if they are not creating new credits.

Thank you for spending time for a good purpose. + rep from me too.



Last edited by Academic on Thu Aug 04, 2011 8:14 am; edited 1 time in total (Reason for editing : spellings)

hunter

hunter
Moderator
Moderator
Thanks for posting the good sum up of the status quo. +rep from me too.
Just wondering what is the best solution for retailers available.
Seems like a good fast market correction is the best option (In Sinhalese; 'Bada virekayak').



Last edited by hunter on Thu Aug 04, 2011 11:01 am; edited 1 time in total

hawklk


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
I emphasized broker credit on the following post

http://forum.srilankaequity.com/t7701-did-brokers-explain-remedies-to-regulator

Quote:

"Stock Brokers should act more like banks. Can you get credit facilities just because you open a saving account or a current account. No. Not even a credit card. Bank give credit only if you are worthy of credit or have some strong security. Stock brokers also should do the same. Just because someone opens a account he or she should not be given credit. At least there should be one year of transaction or some sort of security. This makes money flow in. When I invested 1.5mil 3 years ago, I was given an addition 1mil as credit. Though I did not use it, I should not be given that credit. Now that my investment has grown, may be I am worthy of credit."

End Quote

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