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Flawed Schemes In A Commoditised World

Dec 25, 2014 | Dr C K Narayan | Interesting Read, Long Term Impact | 2 Comments

Or, what brokers must not do.                                                                                                  Dec 25, 2014.

I read in the papers yesterday that brokerage companies are now using a new ruse to attract customers- pay only if you win. Apparently, their research goes, that customers are very concerned about the amount of brokerage paid on their losing deals. So much so that they do not take off their trades (in a loss) for fear that the brokerage would add to their losses. Hence the scheme.

On the surface it seems commendable, almost noble! But in reality this is a dud- for the broker more than the client. Take the statistics. Most people (as high as 80%+) tend to lose in trading. So the odds are stacked against the broker already, if he opts for this new idea. Take the case of the levels of brokerage- they are at basement levels already. With brokers fighting for the same set of people (as new retail is yet to come back to the market, despite the high index levels), the war on brokerage has already carried to levels where it is now beginning to hurt just to stay in the business. Further, the shoe has now moved to the other foot. Time wise when brokers ruled and clients grovelled in front of them! I recall a time back in the 1980s when I called up my broker to ask for rates. He gave me a couple. When I asked for more, he curtly dismissed me by saying that if I was so interested in the market I should come to the market! This was of course at a time when we all congregated at the BSE for participating in the market. Can you imagine that kind of arrogance today?

Clients are in the driver seat and brokers are going all out to lure them from the other competitor.
The scheme also overlooks a fundamental aspect of trading. To believe that it is the small brokerage amount that stands between the trader and his losses is, to say the least, myopic. It shows extremely shallow research into the mental processes that lie underneath trades. It shows a complete lack of understanding of what makes a trader do what he does and why he does it that way. Trading psychology research has proved conclusively that it is not the financial capability or the education level or the societal status or lack of any of these that drives the actions of traders. Therefore to introduce a scheme that is based on a fundamentally flawed premise would be nothing but a gimmick. In a commoditised service you have to do something to attract attention to yourself. This is one such attempt. It is quite unlikely that it will succeed. They will get a few, no doubt. But those are just the kind of foolish traders you don’t want as clients- those who will always be losers. So where does that leave the broker anyway?

What clients need the most is value addition. They would be happy to pay twice the cost for quality service and quality trading assistance. But in an arena where generating commissions and churning accounts is the mandate for relationship managers, what else can we expect but gimmicks? Sigh.


  1. Bhansali

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