Second brokerage pulls out of direct trading

A second broking firm has pulled out of handling direct trading on the stock exchange and others are expected to follow as the New Zealand Exchange nears the launch of a new clearance trading system.

Wellington firm McDouall Stuart said on Monday it would drop its status as a trading participant and no longer handle the settlement of client money.

Its move follows that of Christchurch firm Hamilton Hindin Greene which stopped handling trades in October last year, outsourcing it to ANZ-owned Direct Broking.

McDouall Stuart managing director Andrew McDouall said it had changed its business model and would now focus on becoming an NZX adviser because of the proposed changes.

"We can't see the business being viable with the new clearing arrangements," he said yesterday.

The NZX is in talks with the Reserve Bank to set up the new clearance system which would see all transactions go through a central body rather than trades being done between broking firms.

The clearance system was supposed to be ready by November last year but is now expected to be launched by the end of May, although the NZX has yet to set an official date.

Only those brokers who become officially credited to deal with the clearing house will be able to deal with it directly while others will have to go through the accredited firms. The additional layer is not expected to add any costs to the transaction for investors.

But NZX chief executive Mark Weldon told investors last week he expected the number of firms able to attain accreditation to be just three or four.

Hamilton Hindin Greene managing director Richard Boulton said becoming an accredited firm under the new system would have required more capital than what the firm wanted to inject into the business.

Boulton said outsourcing the trading side allowed it to retain its profile without having the added compliance costs.

Boulton said there weren't many smaller firms left which undertook their own direct broking and expected them to also be considering outsourcing it or selling their business to a larger firm. "There might be a couple of others in the pipeline."

But he denied that the changes meant less choice for investors.

"I don't think it is right to construe there is less competition." The firm still provided its own research and was independent of Direct Broking.

In a statement to other NZX participants the stock exchange operator said it had supervised an orderly wind-down of the trading and settlements of McDouall Stuart and there were no unsettled trades.

"NZX Market Supervision can confirm that all necessary measures have been put in place and actions taken, to ensure there is no risk to McDouall Stuart client funds."