Crunch time at broking firms: The good, bad and ugly

It is that phase of the bear market when sackings and pay cuts at retail stock broking firms start making headlines. And there have been plenty of them in the last few weeks.

In every downturn in the stock market, broking houses are the first to feel the heat, as trading volumes drop sharply. Already, many of the leading brokerages have started closing down unprofitable branches, firing employees and slashing salaries. The question now is: how much worse can it get?

The bad news first. All indications are the current wave of downsizing - of both headcount and pay cheques - could be worse than the one seen in 2008-09 during the global financial market crisis.

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And now the not-so-bad news. Broking firm employees need not be as gloomy about their future as they were in 2001-02 when the dotcom bubble burst.

Back in 2001, when broking revenues fell sharply, firms responded with mass firings in a bid to stay afloat till the next upturn. This time, brokerages are somewhat better placed, even if it is only on a relative basis.

The market meltdown of 2008 came on the heels of ambitious expansion plans by broking firms looking to improve their valuations by having as many branches as possible. When the market crashed, brokerages were forced to close down many branches and focus only on the ones that were making meaningful profits.

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But even as the restructuring exercise was underway, the market rebounded. Confident that the worst was behind, brokerages stopped cutting down on manpower, hopeful that they would be back to making money hand over fist. That optimism turned out to be badly misplaced.

While benchmark indices jumped two-and-a-half times between April 2009 and November 2010, trading volumes did not improve as much. Retail investors largely kept away, unsure of whether the recovery would last. And many of those who returned switched to trading in the less risky equity options.

This was bad news for broking firms as derivatives trading fetched a tiny fraction of the commission earned on cash market trades. There are no takers for margin trading (in which brokers fund their client’s trades), a high-profit revenue stream. Also, the cost of funds has risen, in line with rising interest rates in the economy, and this too is eroding brokers’ profits.

With the slowdown in the local economy set to intensify, and the situation in developed economies appearing even more dire, the outlook on the stock market remains bleak for the foreseeable future. And that is why broking firms will have to cut costs further, a good chunk of which will be related to manpower.

But there is a difference this time. Many broking firms are open to the idea of pay cuts, as against large scale lay-offs. That was not the case in the previous downturns, when most broking firms would fire people without second thoughts.

People in the industry say there are two reasons for this change of heart. One, the pool of regular stock market investors has not grown in last three-and-a-half years. Growth in demat accounts may not be a good indicator because of multiple accounts maintained by the same investor; also, many of the account holders do not trade regularly enough.Given this situation, by firing relationship managers (RMs), a brokerage could end up losing its clients as well.

Second, the more indiscriminately a firm fires it staff, the harder it will find to attract talent in the next upturn. Skilled manpower is already at a premium, as brokerages would have realised some years ago when they were expanding operations.

For employees with an experience of 10-12 years in the industry, there is cause for hope amid the gloom. There is market for their skills, given the explosive growth in banking and financial services industry over the last decade. Besides, the market for commodities and currency trading is steadily growing. Right now, the pay in other related fields may not be as good as that in the broking industry. But the job will be a bit less stressful and the employers a little less ruthless.

For an industry that prides itself as the engine of wealth creation in the economy, its approach to human resources could do with some improvement. Stories abound of howbroking houses force-sacked junior-level employees to submit their resignations, rather than serving them a termination letter. That way, the broking firms save on severance pay, which they would otherwise have to pay when they terminate the service of the employee. And the employees have no option but to yield to the coercion, otherwise they will be denied their relieving letters, which many new employers insist on.

Despite the stress, stiff targets and the fickle ways of the market, the stock broking industry will never face a shortage of people seeking jobs here. As one old-timer in the retail broking industry puts it: “Even though not everybody joins this industry hoping to become multi-millionaires overnight, they know that with a bit of luck, there is a high probability of making more money than they would have been able to in any other line. And even if you don’t dabble in the market, this is among the few professions where someone with limited education can hope to make Rs 50,00-70,000 by just doing their job, when the market is good.”