Once again the global financial markets continued to issue challenges to investors and traders alike in the 12 months to 31 December 2012 .

Total ASX Market turnover per month has been  fluctuating at at contract volumes of between 10,722,707 to 15,259,270 notes per month ( equity trades only listed for ease of  illustrative purposes) and stock brokers and transactional based financial planners are exposed to this through their ASX market participant status and institutional equity sales, wholesale broking, retail and corporate broking services offerings and investment banking, corporate finance,  corporate advisory and such  like.

Volatility exists in the current prevailing conditions are such that, both revenue and cashflow has been lumpy for firms in this space and this has created some  difficulty  to forecast or manage  businesses accordingly during the period.

On the retail side,  market research and the  ATO statistical report of October 2010 indicates that the Australian SMSF industry probably stands at between $362 billion and $1 trillion and the ATO statistical report indicates average funds and size of $869,074 and separate research indicates the number of High Net Worth Individuals in Australia  are qualified as about 270,000 persons.

This dynamic bodes well for significant penetration and revenue growth – either directly (b to c) or indirectly (b 2 b)  for firms in this space , and for firms leveraged to firms in this space.

Where value propositions are clear to clients and potential  clients this positions  those firms very  well in an industry undergoing massive rationalization since the two GFCs – and one that is still facing very difficult conditions . It is my belief that stock broking offerings remain relatively immature and that these have been further challenged by client dynamic , education and wants  which  have been steadily shifting to the use online services. Notwithstanding this ,and paying regard none the less  to a long history of stock broking in Australia I do not believe that full service private client broking where   private client stockbrokers are able to charge fees or a premium for their advice is necessarily completely redundant just because of an  an accelerating rate of uptake  of  online stockbrokers.

On line brokers seem to need to seek to evolve their  businesses in line with the needs of clients or prospective clients and see this consultative process to drive growth as pivotal to their business plans, particularly  in respect to subscription and data customers, institutional equity sales, wholesale broking, retail and corporate broking services.

Companies must  have clear strategies in regards to some of these products and services and where others are under a final stage of review there must continue  a consultative process with customers and other stakeholders in the business and within the distribution and sales chain.

Rationalisation of subsidiaries and financial services licensing will deliver a more appropriate corporate and licensing regime delivering better compliance and corporate governance , cost efficiencies and structures more relevant and appropriate to today’s financial services and corporate regimes.

Client  retention , acquisition and attrition avoidance are important  with the volumes of many brokers  loosely tracking the overall market  liquidity and market share. Whilst the lack of growth in many broking firms is disappointing there have been several factors that impact this result and demand consideration when analysing last year.

Greater efficiencies often manifest as short term pain, however they can  measured  against the potential  long term benefits. Improved dynamics in this space  insulate firms  in the event of further market liquidity downturns but conversely expose firms  to greater economic benefit and reduced time to react to both any gradual or unexpected  market liquidity upturns which could deliver windfall returns.

Secondly , contemporaneous  to and  inexorably linked to this has been a large  investment by Australian firms in responding better to existing matters as well as to changes to and  increased  obligations under market and government  regulatory frameworks. There is an ongoing transition to new legislation and requirements as diverse as insider trading, statutory defences, insider trading and continuous disclosure, front running, dealing with rumours, management of confidential information, how to protect individuals and Australian firms , Chinese walls, internal processes policies procedures and protocols , and consequences of insider trading breaches. The importance of well-regulated, transparent and well functioning capital markets cannot be understated. Australia has long recognized that capital markets are one of the catalysts  for growth in the economy in as much that  they match companies that wish to raise capital to grow their businesses, with investors that wish to place their funds for a return in a liquid and acceptable  market. Thus one of  ASIC’s strategic priorities is the maintenance of fair and efficient financial markets, to allow markets to be effective in raising capital, and also competitive in attracting capital from overseas.

The recent federal budget announcement of $43 million over four years for an enhanced surveillance system allows for ASIC to better plan for a future that will include increased market message traffic, new technologies and trading techniques, increased competition between trading venues, and the increasing globalisation of capital markets.

Each of these market drivers dictate the short and long term goals and strategy of firms in this space in Australia , both in respect to infrastructure , technology and individual , team and firm wide core competencies in legal and  compliance matters and the business development and growth of firms in that regime.

Firms must be well poised to considerably expand their broking business and be responsive, for example, to matters such as upcoming competition in clearing and settlements highlighted by  Federal Treasury , best execution practises and obligations from ASIC , the increased need for more robust controls and market surveillance over increasingly fast automated trading systems and issues relating to matters such as high frequency trading and other Market Integrity Rules .

Firms need to consider the impact of the Corporations Amendment (Future of Financial Advice) Bill 2011 and Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011) which both became law on 1 July 2012, but  with a 12 month transition to 1 July 2013 and  be responsive to matters such as new licensing , training and assessment frameworks including new obligations under the Market Integrity Rules such that , for eg that  each  Designated Trading Representatives are  suitably qualified and experienced, and have demonstrated knowledge of the rules and dealing processes on the relevant trading platform – as is the new requirement.

Whilst all of this has also been a considerable source of attention  and financial investment  for Australian firms  it underpins the possible metamorphism of smaller  market participants with multiple product offerings diverse enough for multiple penetration but so closely aligned and synergetic that they provide scope for scale .

This  increased positioning of resource to legal compliance and regulatory issues by Australian firms  during this last year have been somewhat driven by the broking and trading businesses however they underpin the ongoing confidence of both the market regulators in fully executing the current rationalization  also being experienced in the investment banking , corporate advisory , corporate finance and equity capital markets businesses.

On 25 July 2012, the ASX announced its revised framework for its changes to capital raising by companies in the mid to small cap sector  ie companies with market capitalization of $300 million or less to raise capital. Under the revised framework announced by the ASX, the ASX will proceed with the proposal to enable these companies  to have the capacity, in addition to the existing 15% of issued capital which can be raised under Listing Rule 7.1 in any 12 month period, to be able raise an additional 10% of issued capital at a maximum discount of 25% of the market price within 12 months of obtaining shareholder approval. The new rules came into effect on 1 August 2012 with some other terms and conditions and the  ASX will review the operation of the new rules after two years , however many Australian firms  believe that their sales pipeline in these businesses will be considerably enhanced as a result.

Paying regard to the importance of China and other Asian countries , and the global financial hubs of Hong Kong and Singapore  Australian firms ’s investment banking and corporate advisory strategy is currently spearheaded in Hong Kong and Mainland China and Australian firms must have a  China and Asia development plan and vision, not only for  a greater access to global capital markets but also for their   own working capital requirements.

Mid Cap Australia is very much on the radar as much as our Resources and Professional Services ( such as education). In particular I was asked to travel to Sicily  in  October 2012  to present on Mid market Australia to  a Hong Kong registered network organization of international, mid- market licensed financial services companies that employs about 20,000 professionals dedicated to delivering innovative solutions for their clients across private equity, corporate fund raising, stock broking and fund management.

Their 28 partner firms have completed more than 870 corporate transactions in 56 countries valued at almost US$23 billion within the last two decades; and manage around US$40 billion worth of individual and institutional funds. Through other  members clients of each partner firms are  able to execute trades in over 50 countries worldwide and the organization facilitates investment opportunities in leading, emerging, and frontier markets, and key sources of investment risk capital.Australian firms would like some of that.

Like connections must be established by Australian firms that will support their emergence as being capable of substantial global buy and sell side distribution in many of the world’s major and emerging markets , in addition to enhanced and expanded corporate and strategic planning , local and cross border transactional advice and capability , global research capability, ability to undertake international roadshows and trading of securities and custodial services .Australian firm’s  Asian , American, Middle Eastern  and European thrust towards global buy side and sell side distribution in investment banking and corporate advisory and equity capital markets and private equity must be advanced – the global clock is well and truly ticking.

As providers Australian firms are  also heavily weighted to small and mid  cap market Australian  companies and these firms need to be considered  boutique providers offering bespoke solutions – but with a disproportionate high level of robust infrastructure. The market dynamic and indicators in these sectors  are perceived by Australian firms to be  overwhelming ones of strength and resilience , notwithstanding that  the mid-market sector is not without its challenges in these tough and unpredictable times. Mid-market companies are represented across all industries and have  diverse geographical footprint across  both Australian and ASEAN and APEC  capital cities and regional areas. Australian firms  believe that  whilst mid-market companies represents only about 1.4% of Australian businesses, it provides about one-third of all business revenues and employs more than about 3.2 million workers and contribute about $425 billion added value to the Australian economy compared to large business which contribute  about $393 billion and small businesses – which contribute about $373 billion . Australian firms  see their mid –market target market as the low hanging fruit in prevailing conditions and for the next decade. The downturn commenced later for the mid-market than any other sector. It also finished its downturn earlier than for any other sector excepting for small business, which had undergone an early and sustained fall – making timing of Australian firms ’s new core capabilities opportunistic.

This weighting towards mid market companies is obviously one of the drivers of many Australian firms’ closer formal associations sought with mid- market licensed financial services companies across the globe.

Overall I believe that Australian firms remain cognisant of uncertainties and vagaries of global financial markets at this time; however with good strategies  some see  optimism for the future growth in broking and trading.

There is no doubt there are some challenging times ahead in the global market but canny forms are set to not only survive these changing market conditions but to take advantage of them to build long term value for the organisation and its shareholders.

In keeping with strategic growth, plans and commitment to good governance directors should bring an abundance of financial management experience in both public and private companies and it is of course helpful if some of this is  gained throughout the Asian markets.

Sean Rothsey