Is Brokerage a zero risk operation?

N

nemesis45

Hi all.

I was wondering if being a broker is a zero risk operation.
Why do brokerage firms close down.

These things come to mind -
1) Letting clients take more positions than the margins allow, then run the risk of clients defaulting on those positions.
2) Some % of clients will go to negative balance in their accounts, which the firm may have to incur.

Is there any other risk to the business? These can be managed quite effectively.
What are the costs involved though?

Please , i would love to have this information.
 
Brokers can be classified as having low operating leverage. This means that with a small asset base they can earn a profit on a small customer base and scale up to a big customer base with only adjustments to its marginal costs..ie services and staffing. So cost cutting to stay profitable is easy by trimming those marginal cost areas.

That said. Business with low operating leverage like (need) to load up on financial leverage to generate superior returns. And, that's what all these implosions are made off. Too much leverage, poor risk controls and sometimes fraud.
 
xandman said:
Brokers can be classified as having low operating leverage. This means that with a small asset base they can earn a profit on a small customer base and scale up to a big customer base with only adjustments to its marginal costs..ie services and staffing. So cost cutting to stay profitable is easy by trimming those marginal cost areas.

That said. Business with low operating leverage like (need) to load up on financial leverage to generate superior returns. And, that's what all these implosions are made off. Too much leverage, poor risk controls and sometimes fraud.
More...

Thanks
 
Brokerage is a direct marketing business. Bring in the clients at the right price and half the battle is won. If your cost per new client is too high you have zero chance. Like many businesses marketing is key.
 
Swan Noir said:
Brokerage is a direct marketing business. Bring in the clients at the right price and half the battle is won. If your cost per new client is too high you have zero chance. Like many businesses marketing is key.
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So what are the costs per client?
 
Far from zero risk.

Competition.
legal fees.
fines.
legal fees.
0% interest rates.
legal fees.
risk deposits.
legal fees.
the race to zero in commissions.
legal fees.
fluctuating customer base
and did I mention legal fees?

in short the reasons the OP mentioned that a firm may be at risk such as leverage or DK`s are almost non events in brokerage land. Its death by a thousand cuts if you are not established or bring something special to the table for clients to chew on.
 
Crispy said:
Far from zero risk.

Competition.
legal fees.
fines.
legal fees.
0% interest rates.
legal fees.
risk deposits.
legal fees.
the race to zero in commissions.
legal fees.
fluctuating customer base
and did I mention legal fees?

in short the reasons the OP mentioned that a firm may be at risk such as leverage or DK`s are almost non events in brokerage land. Its death by a thousand cuts if you are not established or bring something special to the table for clients to chew on.
More...

ok. i understand the rest, but could you please explain 0% interest rate please.
They have to put up fee for the exchange i guess, but is it one time. How exactly will 0% interest rates affect brokerages.
 
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