When you put your hard earned money into an account with your broker, most investors are prepared for fluctuating markets and even the rare stock market crash. But this week has seen an exceptionally rare event create turmoil amongst Australian investors. One of the country’s largest independent stock broking firms has gone into administration, leaving tens of thousands of investors worried about their money.
BBY Limited (BBY) is an independent Australian financial services group and stockbroking firm. Having a reach not only around Australia but across the world in cities such as Auckland, London, Wellington and New York, BBY was established in 1987.
The firm started with the formation of Burdett, Buckeridge & Young in conjunction with the State Bank of Victoria, but in 1991 the State Bank was acquired by the Commonwealth Bank of Australia, leaving BBY without major backing. Jefferies & Co acquired equity stake in BBY and thus provided a future for the firm to grow.
For investors to buy or sell shares in the stock market, they must use a licensed broker. Even online brokers are licensed to facilitate your transactions, even if you are the one clicking the Buy button. Some brokers will use third party firms for the clearing of transactions. BBY became a self-clearing entity in 2011, and subsequently began clearing for other firms, growing to be the 2nd largest clearing participant in stocks/options in Australia.
On Monday the 18th May, however, BBY was suspended from trading by the Australian Stock Exchange (ASX) after their executive Chairman Glenn Rosewall appointed KPMG as administrators. Not only were BBY clients left without the ability to open or close positions in stocks and options, but 25 other brokerage firms lost the ability to place orders for their clients.
At the same time, commissions for brokerage transactions have been withheld to those 25 firms from April and May. This has left a gaping hole in the industry as the cashflow effect on smaller firms could result in a reduction in staffing and unpaid bills.
Is your money safe with your broker?
Australian consumers are protected not only by Consumer Law, but by the ASX themselves. Through ASX Clear and ASX Clear (Futures), Australian regulatory standards require these ASX central counterparties (CCPs) to manage operating rules to address any credit losses or liquidity shortfalls as a result of clearing participant default.
What this means is that your stock holdings and money is safe, even in the event of a Clearing party or Stock broker going into administration, such as BBY.
Unfortunately, as is the case here, your stock/option holdings will be tied up in some red tape until a new Clearing party has been designated or transfer has been completed. If in the meantime you had wanted to sell your shares/options, you will be powerless to do so.
When the Global Financial Crisis (GFC) hit in 2007/08, broking firms Opes Prime and Tricom came close to failure causing investors and creditors to embark on a withdrawal of funds which took several months.
Are other stock brokers safe?
In the end, BBY going into administration is a management problem of the business, not a problem with the stock exchange.
The ASX has fined BBY numerous times, as recently as January, based on their operational procedures. At the time, the ASX ordered BBY to improve its risk management systems and processes. This clearly has not been resolved, ending with the ASX suspending the firm from trading.
The question of whether this could occur to other brokerage firms in Australia is all dependant on whether they are managed well or not. Commsec, eTrade, Macquarie Bank, NAB Trading, Morrison Security’s Pty Ltd, Westpac Broking, Bell Direct, CMC Markets, Halifax Investment Services … all of these firms provide either Full Service or Online broking services to trade stocks, options, warrants, CFD’s, futures or foreign exchange. While there is a possibility the same could happen again, history suggests it is a low probability.
Revenue in the stock broking industry has certainly contracted heavily since the GFC, and has failed to recover. This is evident through numerous mergers and closures of firms over recent years. It is also a major factor in the downfall of BBY, although their ambitious expansion in recent years reflects the failed attempts of ABC Learning a few years ago.
A solution that is safe …
Here at Halifax Investment Services (yes I am an advisor for stocks and derivatives [options] for the US markets), we had taken action to transfer clients more than a month ago. While we were not aware of the severity of the problem at BBY, restrictions that started to affect our clients ability to make transactions led to sourcing alternative solutions.
Halifax Investment Services provides numerous platforms for trading, with different clearing partners in the background. Our primary online service is the Trader Work Station, which has Interactive Brokers who uses Penson Financial Services as the clearing partner.
If you are not familiar with Interactive Brokers (IB), a little research online will provide more than enough information. Simply put, they were founded in 1977 and are a US based broker. You can trade anything in the world (literally), on any exchange. Their technology is leading edge, although their platform might be a little too complicated for the beginner. Still, like anything, it is a tool that can be learnt as long as you put the time into it.
A distinct advantage using IB is that clearing is ‘real-time’. That is, instead of an end of day evaluation by the Clearing Partner or the ASX that can cause panic amongst investors, IB uses electronic systems to immediately calculate positions and account exposure, warning the investor immediately. If this type of system was in place with BBY, this might have prevented the situation we have today.
Are you looking for a new broker?
Through our Trader Work Station platform, and other platforms, we can facilitate trades in stocks, options, futures, foreign exchange or even CFD’s with some of the largest Clearing Partners in the world. You can have a broker place the trades for you, or you can place the trades yourself, for no additional cost. The choice is yours.
If you would like to know more about the types of accounts available, or to discuss the latest developments with BBY and your trading account, CLICK HERE for one of our advisors to give you a call, or feel free to call us on 07) 55854200 or 1300 363 505.