Discount Securities Ltd was naked

Just over 2 months ago, I did a little post looking at how leveraged NSE brokers were. DSL stood because as at the end of 2007, it had done 300 times as much business as it had capital which was just asking for trouble.

Lo and behold, today "its under management of KPMG" an euphism for being under receivership. I still worry about Apex because of its leverage and AIB because things are not good.

Seeing many say its good to diversify, moving brokers or having more than one broker at a time is not a bad strategy.


The title alludes to WB's famous saying about only being able to tell who was swimming naked when the tide goes out i.e. when markets fall.

Is your broker about to undergo a liquidity crisis?

In business, cash is king. In banking, capital is king. In ibanking/brokerage, capital and leverage are king and queen. In layman terms, if a broker can't pay you when you sell your shares or doesn't buy shares in a timely manner, then its because its simply doing too much business compared to its capital.


In the light of this, I looked at this table and you can tell which brokers will or have been attracting a lot of complaints based on slow dispersal of funds to clients.

The golden rule here should be that a broker shouldn't be doing more than 100 times their capital because if there is run on a particular stock, they simply won't have the funds to pay-out clients in time which will in turn lead to panic selling and further withdrawals.
Look at Nyaga, Discount (CMA had an issue and so have investors who frequent our local chatterline), Apex (I haven't heard many complaints but again that is way too much business for its capital levels). I also fear the same for Ngenye. Are D&B's capital numbers correct because that means its heavily under-utilised.

So to add to this post, make sure you get sight of a broker's accounts and especially how much turnover its doing against its capital.

Stockbrokers: My take

So far I use 3 brokers who have very contrasting approach to order execution; customer service; corporate governance; communication channels, internet and honesty.

D&B:
Order execution: Many brokers dislike price-limit orders, but D&B even more. Orders take long especially if you only deal with one person. Send to their shares email account for faster execution. Then they can be executed within 24 hours. They'll also make wrong orders so you have to be vigilant.
Customer Service: Varies with the person you deal with but generally speaking, D&B barely put up with retail investors. They prefer the likes of John Kiarie, who deposit loads of money no questions asked. Dividends will take long or never be credited into your account unless you chase.
Corporate governance: Make it your point to know who is the CEO and the owners of a broker. I know Mohamed is the CEO, I know Jimnah is a shareholder, but does he own the whole of D&B?
Internet: D&B has the best online system I know of among the brokers that I deal with.
Communication channels: Email response can be erratic.
Honesty: They wiggle around when they've made a mistake.

AIB (formerly Ashbhu):

Order execution: Excellent mainly because of Nina, its operations manager. Will normally execute within 48 hrs at the latest. I believe its one of two brokers that offer "prompt" board trading.
Customer service: Will respond to most queries, but tend to be non-existent when it comes to some queries.
Corporate governance: CEO is Peterson Mwangi and he is very available. I know who the 4 principal owners are. AIB also publishes accounts for all to see at its office.
Internet: Online accounting is still non-operational months after I complained about it.
Communication channels: Email response to most issues is very quick; generally responsive to suggestions.
Honesty: When there was a mistake in my order, they owned, corrected the mistake immediately and took a hit on their own account. However, called and was told they were not doing Celtel Zambia IPO, only to find out that they were involved.

Suntra:

Order execution: Quick response
Customer service: Respond to issues but tend to be very silo'd so can take long
Corporate governance: CEO James Murigu is very well-known and affable by all accounts. Don't really know the principal owners.
Communication channels: No known email account, but telephone response is good.
Internet: Online accounting is patchy at best.
Honesty: no comment as no issues have arisen yet.

Friday Shorts

As the convulsions keeping on blowing through the financial world, a wind chill is passing through London which still holds the financial centre mantle. Practically every investment banks has made a portion of its workforce redundant primarily the mortgage desks and its now spreading to back office. It'll shortly start hitting the high street banks. The issue is that since investment banks and others have discovered that they can't write-off their CDOs/CDS books without shutting shop, they've decided to sit on the stuff until the housing market in the US improves and that is not going to happen this yr. This then means that they can't underwrite IPOs, M&A, loan arrangements deals et al. Tough days. Most firms either use FIFO (first in, first out) or look at the highest paid when deciding on redundancies.

The scramble for Nyaga and other weak brokers will be intense among those banks that have been wanting to get into the business. I think Equity has got to be favorite for Nyaga's license especially given that most of the investors with Nyaga are from its natural playground of Central. If Equity with its customer base gets a license, its game over for many retail brokers.

Kiarie's move from BAAM is a big loss to it. He actually built the business from ground-level. I'm surprised BAAM let him go easily. He is the type those old-moneyed like Wairegi like employing i.e. very competent at what they do and not political.

Does Kenya have a food policy? What we are seeing in countries like Egypt, China could be a harbinger of food shortgages to come...

NSE fallout from Nyaga?

Nyaga processed Ksh8.2bn of all transactions at the NSE last year. Yes, Ksh8.2bn and it still went bankrupt. Nyaga had 25% of all accounts held at the NSE. Nyaga uniquely probably had the widest network of branches of all the brokers. But Nyaga was probably bankrupt right around the fiasco of Mumias second OFS in 2006 when I started hearing noises about bouncing checks. If we don't have a bearish market over the next few weeks, it'll only be because a lot of investors used the last year to move away from Nyaga. Nyaga is said to have owed Ksh800m against something like Ksh200m in assets i.e. a buyer would have to buy Nyaga for Ksh600m to make sure everybody got there dues. Nyaga of course means ostrich so this one must have had its head in the sand for a considerable period.
Identifying what needs to be done is the easy part,

1. Financial services regulator with a remit to look at all deposit-takers
2. CDSC must been given the power to police trades and become a different audit trail
3. Stockbrokers must file daily returns that reconcilable to what is held by CDSC
4. NSE must de-mutualise
   

Doing it isn't easy because it should have been done last yr,
but because FT found a buyer, the unpalatable steps were not taken. It’s a bit like our political scene.
Talking of which, don't some peeps like Muthuara and Martha realize the kind hole Kenya was in last month? Muthaura needs to go to his farm and enjoy retirement while Martha can become our first female Rais
but needs to pick up the populist lessons from the golfing Raila.