About brokers and churning

People like to say "When the revolution comes, they'll shoot the lawyers first". But I think it'll be the futures brokers because there are fewer of them and they've caused a lot more damage. Fortunately they are becoming extinct as online trading becomes the norm. The best broker is a machine.

Why this irrational loathing of brokers? Because their interests, dear trader, are diametrically opposed to yours. The more frequently you trade, the less likely you are to make a profit - not only because of brokerage fees, but also because a frequent trader is usually a confused trader who is, ultimately, gambling. There are some exceptions to this such as arbitrage traders who make a modest living from relatively low-risk high-frequency arbitrage trading.

Brokers die if you don't trade, and become fat and sleek if you trade often. It is therefore in their interests to encourage you to "churn" your account, i.e. keep buying and selling mindlessly.

In my experience, Australian futures brokers have been the worst in this respect. They were laid back and disarmingly unprocedural, leaving the client wide open to psychological manipulation. Here's an example of how an Australian broker got me to "churn" my account : he interrupted a business meeting with an "urgent" call to tell me that President Gorbachev had pneumonia and, with his weak heart and all, could die, ergo Glasnost ends and the Cold War returns and world markets crash, ergo sell.

Now, I'm in this meeting in Java right, so the other people are listening in awe as I interrupt the meeting to sagely discuss Gorbachev's health with a broker 5,000 km away.  Being older and wiser now, I would laugh and put the phone down.  But then I felt self-important and flattered that he would call me from overseas. I couldn't resist making the trade in front of my business colleagues, who were suitably impressed. Result : a win for the broker and a loss for me.

Scales fell from my eyes when I later visited Melbourne and discovered that this expert in world economics and politics was a hungry-looking youth of not much more than 20.

For what it's worth, the best brokerage I came across was Lind-Waldock's London office, trading the Footsie. They insisted on their clients using a tightly-defined terminology to place all orders, greatly decreasing the likelihood of any misunderstandings and also de-personalising the relationship in a very professional way, however much the individual trader may yearn for the false dawn of a broker's advice. If I didn't use their terminology, they simply refused to execute the order - first and last broker I've known to turn down a trade. Their manager once told me my order to sell 40 Footsie contracts at market on close was the biggest Footsie moc* order they'd ever placed; today I imagine it's commonplace.

I worked with three different Australian brokerages, and communication errors were commonplace with all three of them - "No worries Tim, we'll credit that trade back to you", but it shouldn't be happening in the first place.  A Queen's Counsel later tried to persuade me to sue one of these brokers for his unprofessional behaviour on a no-success-no-fee basis, but I'm a believer in caveat emptor.

*"moc" = at market on close

Next : Trading stock index futures              Home

 

The contents of this website are copyright © Tim Bowyer 2004-5 ~ All rights reserved ~ No reproduction in any form allowed, except for Appendix 2 for non-commercial use only. This website is managed by Active Audiences.