The broking business is getting grimmer, says Prakash
Kacholia, MD, Emkay Global Financial Services. He tells Ankit Doshi that the use of technology will slowly replace human capital and that investment in technology has to be a continuous process. Excerpts:
How is the broking industry performing?
Retail participation in equities has dwindled after the 2008 crisis. Every time retail investors lose money, their confidence drops. A lot of money has moved to debt and other products because equity, as a product, is being challenged today. Since this is a service-oriented industry, costs cannot reduce beyond a point or the quality would deteriorate.
Several brokers were enrolled in the currency segment as they could execute trades without additional investment in infrastructure and manpower. That increased the yield without increasing the back-end cost. With equity markets going nowhere, currency trading helped increase the turnover and also offset the fall in equity turnover.
Small sub-brokers shutting their business will only increase efficiency because, instead of handling hundreds of sub-brokers, a firm will have to handle a few sub-brokers, who significantly contribute to the top-line and, therefore, would be better placed to provide superior service. Consolidation is a must for this industry because there isn’t enough business for all of us.
With algo trading, have institutions downsized their work force?
Quantitative trading, algos, direct market access and high frequency trading are the biggest structural changes in the broking fraternity. Most equity business happens in derivatives, which is speculative and volatile.
With co-location and algorithmic trading, a lot of brokerage houses have started running their dealing desks, especially institutional business, on algos. Globally, technology has been replacing human capital and so would it here. The number of dealers required would reduce with more and more algos getting deployed. Investment in technology will have to be a continuous process.
What is outlook for the equity markets? How do you see it playing out in the long term?
The definition of long term or short term changes so often that if you buy today and make money tomorrow, it becomes a short-term investment, whereas if you start losing, it becomes long term. Retail investors are no longer interested because they burnt their fingers. Indian markets have grown more exposed and vulnerable to global events. In the absence of confidence in the equity asset class, the markets have become very shallow.
So, how does one trade the market? Stay away?
Based on the asset allocation, the best way to play the equities is through SIP. What is important, though, is investing in something only after thorough research. Investors needs to restrict their portfolio to selective stocks. The investor also needs to respect money. Unfortunately, that?s not the case anymore.