| The changing landscape of stockbroking in Ireland |
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| Tony Garry compares the Irish stockbroking market fifteen years ago with the present one and finds that the changes have been dramatic both in the number of stockbroking firms in operation and the ownership of the firms. |
First of all congratulations to Finance on their 15th anniversary - no mean achievement in the publishing business in these turbulent times. When I first gave some thought to what had happened in the stockbroking industry in Ireland over the last 15 years, my initial feeling was that while there had been some changes they weren’t particularly dramatic. However, when I looked more closely at the landscape prevailing in 1987 and compared it to 2002 I discovered how wrong I was. In 1987 there were 17 domestic broking firms, only 6 of them survive today. Currently we have 10 domestic firms with 4 new arrivals during the period, BCP, Merrion, Fexco and Dolmen.
The ownership structure of most of the surviving firms has also changed dramatically with the 4 major firms, Davy, Goodbody, NCB and Riada, now wholly or partly owned by banks. Apart from the ownership structure, the fashion in which we conduct our business has also changed significantly.
In 1987 Irish brokers dealt strictly as agents in both bonds and equities operating on a fixed commission regime, which was set by the stock exchange. However, things were about to change - in early 1987 we were still recovering from the shock of a 35 per cent reduction in bond/gilt commissions, which became effective in October 1986. Over the next few years with a nudge from the Competition Authority and a push from the newly formed NTMA, we had to come to terms with the abolition of gilt commissions and the introduction of market making in the Irish government bond market. Despite dire predictions that the Irish brokers would not be able to cope, a healthy competitive bond market developed in Dublin. During this period, the recovery in our public finances and the convergence story, based on our membership of the ERM and the support for the idea of a single currency gave ourselves, and other Dublin brokers, a great story to sell to overseas investors. We had some limited success in earlier years when things were really grim and in this context it is worth remembering how low the Celtic Mouse had sunk in the early 1980s.
Older readers may recall that when Charlie Haughey became Taoiseach in 1980 he addressed the nation on television against a background of high inflation and rapidly deteriorating public finances. He told us in no uncertain terms that things could not continue as they were - unfortunately he failed to follow through on this message and things got worse. In 1981 the exchequer borrowing requirement and balance of payments deficit were respectively 18.1 per cent and 14.7 per cent of GNP, long bond yields touched 20 per cent and inflation was a whopping 20.4 per cent. During the remainder of his term things got worse. The coalition Government of 1983/1987 tried in vain to stem the tide but the public finances were in a tailspin. A 10 per cent devaluation of the pound within the ERM in August 1986, was with the benefit of hindsight, hardly surprising.
Despite this background, we did manage to sell some Irish government bonds to UK and European investors during the 1980-1987 period. By comparison, selling bonds to foreigners during the McSharry years was a much more straightforward task. The main attraction was the yield spread over other ERM markets - the spread over German government bonds was 550 bps at end December 1986, compared to 20/25 basis points today. One of the more curious aspects of the Irish bond market in the late 1980s and 1990s was that continental and US based investors bought the Irish convergence story much more enthusiastically than their UK counterparts. Maybe it was a case of familiarity breeding contempt.
With a background in bonds I must be excused if I already have devoted a disproportionate part of this article to the bond market. However, I believe brokers’ experience in selling bonds overseas played a vital role in the subsequent development of the Irish equity market. Through the late 1980s and early 1990s the equity market was owned primarily by Irish institutions and Irish retail investors with a sprinkling of UK institutions, most of whom had ? liabilities. Encouraged by their success in selling Irish gilts to continental and US investors, the equity sales desks in Davy and the other major Dublin brokers began to venture overseas. The healthy and fairly intense competition between the Dublin based broking firms also spurred this development. The development of this overseas client base greatly helped the development of the Irish market and this was seen to great effect in recent years when Irish institutions were able to significantly reduce their exposure to the Irish market without unduly upsetting the market.
The make-up of the equity markets has changed dramatically over the last 15 years. The relative standing of many quoted companies has changed significantly. Many companies have disappeared from the list, many new ones have arrived and of course some such as Eircom and ESAT have come and gone. The new arrivals have been concentrated in financials, food and technology. Some of the names no longer with us are Carrolls, Clondalkin, Irish Distillers, Hibernian and Woodchester. Looking at our business today by comparison with 1987, some of the major changes that have taken place can be summarised as follows:
• Significant growth in staff numbers 120-380, with the increase spread right across the firm in research, sales, corporate finance and private clients
• The number of domestic institutions has reduced significantly while overseas institutional customers now account for a much larger proportion of our business
• The trading floor of the exchange has been replaced by an electronic screen based dealing system.
• The degree of regulation and the complexity surrounding the way we conduct our business has increased dramatically, particularly in the case of private clients. An inevitable consequence of this well-intentioned trend is that it will become increasingly uneconomic for brokers and other financial intermediaries to execute business for the small investor.
• In 1987 the Dublin brokers competed vigorously with each other and they more or less had the Irish market to themselves - it was too small and illiquid to attract interest from London. That is no longer the case as growth of Irish corporates, and indeed the private client market, has attracted all the major international houses.
While there are times when I wish these overseas competitors would go away, I believe their presence has helped the Dublin based firms to raise standards in all areas of our business. Indeed, over the years our proximity to London and our membership of the London Stock Exchange has helped greatly in the development of the broking market in Dublin. As far as the future is concerned, I am sure there will be plenty of excitement over the next 15 years. On the private client side, brokers will have to offer much more than a facility to buy and sell shares if they are to capture significant business in the high net worth sector. On the institutional side of the business the emphasis will continue to be on the global distribution of Irish bonds and equities. Scarcity of product is the major concern as some Irish corporates will undoubtedly disappear off the scene, e.g. current developments at Green Property and Smurfit. However, we hope and expect that the flow of replacements such as C&C will be more than sufficient to fill the gap. Success in stockbroking, as in any service business, is a function of how successful you are in meeting the customers’ needs. Nowadays we regularly hear the cry, ‘Customer services is the battleground of the future.’ In stockbroking customer service will only be as good as the people on the team. The main challenge for us going forward is to continue to attract and retain quality personnel. On a personal note the last 15 years have been hugely enjoyable and it has been a privilege to be part of such a great team in Davy and to work in such a dynamic environment. I can only hope that the future will be half as good. |
Tony Garry is chief executive of Davy Stockbrokers.
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| Article appeared in the June 2002 issue.
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