Managing A Securities Brokerage House

Dr. Victor S. LimlinganJoint AIM-Wharton Seminar

The Way to Nirvana

Three States of BeingFour Noble TruthsFive PitfallsSix Paths to Success

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Three States of Being

1. Foreign Broker2. Captive Broker3. Independent Broker

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Four Noble Truths

1. No barriers to entry2. No economies of scale3. Owner’s presence vital4. Client business divisible

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No Barriers To Entry

No ownership restrictionNo management restrictionNo branch restrictionNo market share restrictionNo local debt restrictionNo foreign debt restriction

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No Economies Of Scale

Backroom operation done through mini-computers

Large trading volume can be done by few traders

Fundamental analysis open to publicTechnical analysis done through

cheap and easily available computer programs

Seminars open to everybody5

Owner’s Presence Vital

Enormous LiabilityNegotiable InstrumentsVerbal CommitmentsDiscretion given by clientsAgency problems

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Client Business Divisible

Client business can be spread to several brokers

Clients may prefer to use several brokers

Clients may choose different brokers for different stocks

Clients can easily switch from one broker to another

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Five Pitfalls Of Management

1. Taking a position2. Tempting your staff3. Extending margin loans4. Depending on a bull market5. Fighting a bear market

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Taking A Position

Will distract from broker roleCreates conflict of interestClouds objectivity in advising

clientsCould lead to significant losses

broker controls excesses of clients nobody controls excesses of broker

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Tempting Your Staff

Exposed to clients’ good fortuneLimited financial resourcesUnlimited financial expectationsKnowledgeable about weak

spots in company’s control system

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Extending Margin Loans

During a bull market, an unnecessary service to the client

During a bear market, a distasteful task of management

During a dull market, an unfamiliar business (banking) for the broker

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Depending On A Bull Market

Staff strength should be based on bear market, during a bull market do not increase staff but rely on computerization, staff overtime or as a last resort outsourcing

Bull market should be used as the time to beef up financial reserves to weather the next bear market

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Fighting A Bear Market

Refrain from generating artificial volume

Review exposure to clientsEncourage staff as well as

yourself to use vacation leavesPrepare for the coming bull

market

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Six Paths To Success

Be a discount brokerBe a retail brokerBe a network brokerBe a specialist brokerBe a tax haven brokerBe a private broker

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