One of the problems which hit stockbroker BBY in the weeks before it went into administration was a sharp fall in bank stocks.
The banks and other financial stocks, once the darlings of retail portfolios because their dividends are seen as solid, have dropped 11.4% since the market peak on March 18, officially entering a technical correction.
The slide started with Westpac posting a flat and below expectation first half cash profit of $3.778 billion. This was followed by the Commonwealth Bank with a disappointing March profit of $2.2 billion.
While BBY was a small player as an equities broker, with around 1% of the market, it was big and getting bigger in options with about 8% of the market.
This was driven by BBY’s tiny fees and subsequent paper thin margins.
Traders are required to cover their option plays to ensure they can pay out if the market goes against them. However, the fall in bank stock prices is understood to have caught many traders short.
This left BBY responsible for covering the losses and the broker got into liquidity trouble. Executive chairman Glenn Rosewall, the son of tennis legend Ken, reportedly found $6 million last week to cover big calls missed because some customers didn’t have enough collateral.
Cracks were showing in January when the ASX criticised BBY’s risk management and fined the broker $180,000 because it didn’t have enough funds to cover a $192 million transaction in 2014.
And on May 8, Rosewell said the company’s options business had grown too quickly.
“The BBY board believes that with the current gyrations in the market, and the pressure on advisors to ensure that their clients’ exposures are properly collateralised, it is prudent for the rest of the business that BBY exits the Options clearing business.”
Ten days later BBY called in administrators, Stephen Vaughan and Ian Hall of KPMG, as the 170 staff were informed by email that the company had been unable to secure investors to inject additional capital into the business.
St George Bank then called in receivers, Stephen Parbery and Brett Lord of PPB advisory who are now digging in deep into BBY’s books.
It’s understood the liabilities are greater than first thought, well beyond the $2 million to $3 million BBY was seeking over the weekend as a capital injection.
The big question now is what happens to the thousands of account holders who now are probably looking at weeks before they know what will happen. Even trades of last Friday have been wound back.
And on top of that there are up to 25 shadow brokers, including Quay Equities and Oz Financial, who used BBY’s infrastructure and who are now scrambling to find new partners.
The ASX run the National Guarantee Fund, which has more than $100 million in funds, can be used as compensation.