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5/16/2012

The last nail going in



We used to have a healthy and vibrant stock market and a finance industry supporting several thousands of professionals and supporting staff. The market used to be plodding along happily in its own steam with steady growth and an envious reputation of a successfully run system. This was despite the fact that it was a very small market with relatively small number of stocks and small number of investors.

There were some unique features in the system that allowed the stock market to function the way it was, punching above its weight like they used to say. The market thrived on volumes and demands over supplies. Where were the volumes and demands coming from in a small city state? There were two unique features that made this possible, remisiers and contra trade. The former took on the role of ‘ah long’, taking high risk, to extend credit facilities to their clients which no banks would want to do or allowed to do, too risky and without collateral. But it worked most of the time, based on trust and knowledge of the client’s ability to pay for losses. This allowed the clients to trade many times more than they were able to without being limited by upfront collaterals or cash deposits. It worked. The market was alive.

Contra trading also facilitates liquidity in the market. Clients could take positions and settle the differences when they squared off their positions. It used to be more than 14 days, and that gave the clients more room to manouvre. The longer the exposure, the greater would be the risk, but also more chances of market changing positions. In a way contra trading played the same part as remisiers in allowing clients to take bigger and more positions than they were able to if trading is restricted to money upfront. For a small pool of investors in a small city state, contra trading allowed the trading volume to appear tens or hundreds time larger.

Between the credit lending role of remisiers and contra trading, the market was able to trade with much more volumes than it could otherwise do. Doing away with remisiers and contra trading would be like knocking in the last nail to send the stock market into the incinerator.

No, apparently the smart alecs don’t think so. They believed that there is no need for remisiers and trading could be done online by computers. The shallowness of such stupidity has proven itself, and online trading is still standing on the high pedestal as a white elephant, too high cost to operate and for too little return. And there were all the other factors that made online trading ineffective and unworkable as a business model. It is history. It is also a reminder of where the market will head if people with little knowledge of how the market works make the decision. And there will be people who know but kept quiet, follow orders as long as they are paid, and do the master’s will.

The next attempt is to do away with contra trading. It is too risky, reduce the duration of exposure. Traders still have 5 trading days to square their positions. And there is no collateral, too risky. There were bad cases of bad debts. This too must be taken care of. Margin trading could be a solution. Better to do away with the remisiers altogether.

In all businesses, there were risks involved and bad debts could be incurred. So far, all the bad debts were manageable and were part and parcel of the business. The bad debts were not in the proportions of hundreds of millions, billions or tens of billions like the losses of well managed funds and banks. If bad debt is such a serious concern, all the big funds and banks should be closed down or not be allowed to take those risks. How come their colossal losses were acceptable as part and parcel of risk takings and taken in their strides as clever investment strategies but losses of small investors were unbearable? How come the few millions of losses by a few individuals in an industry of a few hundred thousand players were seen as so fearsome to live with?

There were rumours that contra trading would be replaced by CFD or contract for difference. What’s the difference between CFD and contra trading? CFD is claimed to be much better than contra trading. It allows the traders to hold their position longer, several weeks even if they wanted to. Shit, contra trading used to be like that but the length of holding to long positions were curtailed, deemed as too risky. In CFD, holding long and longer position is a plus point. CFD also can short positions. Now, why were short positions not allowed in contra trading? Isn’t this as good as saying having free sex is bad but going to prostitute is okay, both offering the same thing but the latter got to pay more?

What’s the difference between CFD and contra trading? Isn’t it contra trading in another name, another form? Oh it is not called contra trading. It is called Contract For Difference. Brilliant eh? The industry is being prepared to switch from free sex to having sex with prostitutes as a better option.

When this happens, the contra players would vanish. The remisiers too would vanish. And they expect the market to continue to thrive, bustling with billions of trades done by the computers. And the funds would still be churning the market without any suckers to pay for their expenses and profits. The funds would be happily chucking along in a stock market with practically no investors and no money to make, just to make the stock market look good for the city state.

Just wait for the smart alecs to knock this last nail in and everyone in the industry can go away. The fictitious trading volumes will still be there, an envy of all the outdated stock markets who can never dream of such volumes. But their phones in the brokerages will be ringing. The brokerages here will be as quiet as a cemetery, if any is still left standing.

10 comments:

Anonymous said...

Really totally hopeless ?

Any advise for remisier wannabe ?

Chua Chin Leng aka redbean said...

You want to join the ranks of low income earners?

Commodity Market said...

Thanks for this article, the information is pretty good. Although you are talking about only Singapore, but trading in such time is risky. Economy of many countries once again looking in crisis,

Anonymous said...

Market is what it is today coz someone had a wet dream to turn Sin into a NY or a London financial centre.

Ma's Ghost said...

As with all things, stock trading must too evolve. I used to trade through remisiers but don't now for the simple reason that they are not able to underwrite the size of my trades due to their limited financial resources.

Now, the brokerage extends facility for me to buy or sell and a company dealer is assigned to me.

The brokerage I pay is the same. I can either trade online cheaper or call but with financial news available at the click of a mouse, the assigned dealer appears quite redundant and that goes for remisiers as well. Some remisiers are so outdated in terms of their knowledge that they should have been put to pasture long ago.

CFDs are a good instrument to trade. The old methods no longer works in fast moving financial markets.

About the one thing I agree with your post is that it is only a fool who would want to enter into the business.

Chua Chin Leng aka redbean said...

Hi Commodity Trader and Ma's Ghost, welcome to the blog.

It is true that some remisiers are pretty out of date. But there are still some punters that need the services of remisiers. For the tech savvy and well informed, they could to it on their own if they have the time and knowhow.

As for CFD and contra, they are quite similar except that one you got to pay for the extra packaging like paying a prostitute. The other advantages were really no advantage until they took them out to restrict contra trading.

It is actually LPPL.

Cheers.

Anonymous said...

Overheard these two FTs laughing their guts out. 1c share in the mainboard! Hahahahha. Bloody joke.

I have to agree. It is a joke to have so many penny stocks in the main board that are utterly worthless. What a financial centre and what a great stock market.

Chua Chin Leng aka redbean said...

Asian bourses should not welcome foreign funds to set up just to sell toxic notes and derivatives. These are destructive to the value of stocks.

And for the use of computers to trade against small investors, this is criminal, unfair trading practice.

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