Thursday, September 25, 2008

Panic in America : Effect on India

A large US $ 700 billion payoff is under negotiation in the USA. Most economists / financial analysts are opposing this payment to big banks. President Bush has said that this needs to be done urgently or 'America will face a painful recession.'
While the Americans will finally decide on what they will do with their financial institutions, the entire world will be affected by the events in the USA. India will also have to face the fallout, if any, of the ongoing crisis.

The Coupling of economies.
No, we are not decoupled. Stocks will be adversely affected if the US markets fall. if the US Markets rally, we should go with them.

End of the Broker - Dealer
In the USA, the Investment Bank model has abruptly ended. In my blog, I have warned earlier of the risks associated with brokers who trade on proprietory accounts. I will explain in some detail.
The Brokerage business will see a major change. Two different segments will survive.

First, the Broker - Banker. This includes all brokerages sponsored by banks. HDFC , ICICI and so on. They have to be sponsored by a Bank. The Broker - Banker will become increasingly important.

Second, the boutique brokerage. This is the small brokerage where all clients know the broker. They have the broker's cell number. The Broker knows them by their first name. This segment will survive and prosper. The Broker offers top class brokerage services and does nothing else.

The Segment which will NOT survive is the broker who acts like an investment banker. (remember Lehman Brothers ..). This group is in proprietary trading, branch expansion, wealth management, .. You name an activity, they have their fingers in it. If you have a broker who resembles this profile, you may like to shift to any of the two segments described above.


Kaushal said...

Dear Sudarshan
What shud we understand by the term
" BROKER SPONSORED BY A BANK". Does bank take any guarantee for the broker or what it means?
It seems that in India if there will be effect of this crisis on the financial sector then the ones
that wud be in limelight wud be icici and hdfc. In fact Mr. Kamath and their other senior persons have appeared 2/3 back on cnbc assuring
soundness of their bank, and admitting that some customers in chennai wanted their money. To what extent can we rely on these banks? Because in these times of liquidity crisis, when there is a run on banks, it is more fatal, exactly like when the doomsday comes only a small quantiity of shares sold r eneough to bring the bulls to their knees.
I am looking for a change of my brokers as they give too many advises and I feel they take good advantage out of it. I trade via broadband internet.
Cud u pls suggest some names from the two categories you have pointed out, I am stationed at kanpur.

Shashank Jogi said...

It might not be the best idea to apply the future US brokerage model on to India.

Yes, I agree that Bank sponsored Brokerage houses will do well.

I am not sure boutique houses would be one of the surviors going forward. In light of poor market conditions, volumes have and perhaps would continue to stay low. Boutique houses, with their small customer bases and lack of economies of scale might not be able to stand up to larger pure brokerage houses which, inspite of getting hit, will survive and prosper in the next bull run.

Which individual broker can offer a 0.1-0.15% brokerage on delivery transactions?

But I agree, that investors should be vary of brokers who trade themselves.