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Will stock brokers survive?

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As has been the case for a few weeks now turnover on the stock market has remained relatively low. In the week under review activity remained subdued with turnover taking a 49% plunge to $3,3 million.

Market capitalisation was stagnant at $3,6 billion which is below the key psychological level of $4 billion.

The reduced level of activity on the stock market has a negative bearing on different market participants.

Investors are the most affected as they are unable to buy or sell significant volumes when activity is depressed.

As the end of the year approaches, fund managers will be worried about their annual performance and feedback to their clients which usually come after this period.

Stock brokers have an even more pertinent situation to consider at year-end: Is it worthwhile to remain in business under the current conditions? Revenues for brokers are almost entirely comprised of commission and in Zimbabwe this is fixed at 1% of the gross proceeds of a transaction.

Considering this charge on both the buy and sell side of the transaction and taking last week’s turnover of $3,3 million, we can calculate that the whole stock broking fraternity made $66 000 in brokerage. Divided amongst the 19 active brokerage firms in the country this works out to an average gross income of $3 474 for the week per broker.

The five most active brokers account for about 60% of market activity, meaning the smaller brokers’ share is even less than
$3 474.

Typically stock broking firms have high fixed costs which include office rentals, administration costs to support the paper-based system of transacting and salaries for a huge staff complement made up of dealers, analysts and back office staff.

Considering the costs involved in running these broking firms versus the income they earn when market activity is depressed as it is now, we suspect the broking industry is facing a very challenging phase financially.

The shareholders will have to dig into their reserves and eventually inject new funds into the businesses just to keep them running. The capitalisation requirements for stock brokers are low at $150 000.

Brokers housed within a diversified group of companies may be able to ride on the back of other group companies, but we fear if the situation does not change a couple of brokers may close shop — perhaps by the end of the year.

Competition amongst brokers is essential for the smooth operation of the market as it forces brokers to offer clients the best service — otherwise they lose business to competition. Active bidding at the exchange also ensures increased efficiency in the pricing of shares. For their sake and the market’s we hope brokers will manage to survive these lean times.

Increased liquidity in the country’s financial markets and the return of an active foreign investor contingent will bode well for market activity and we hope these will improve soon.

Next year is possibly an election year and how these elections — if they are held — are handled is going to be the key influence on the market.
Meanwhile those with cash and at least a medium-term investment horizon may take advantage of the depressed prices to get exposure to equities at discounted prices.

In the process brokers would be making much-needed commission, which will hopefully carry them for a while longer while they wait for things to improve.

— Extracted from the weekly review of November 4 2011 produced by Tetrad Group

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