Muhammad Zubair Ellahi hardly looks the part he’s been playing for 30 years.
Instead of sitting across an expensively dressed, self-important smooth-talker, I found myself speaking to a man wearing a regular blue checked shirt and worn-out pants with thickets of undyed hair on his head. He was devoid of the superstar airs that the public associates with the cut-throat world of high-flying finance professionals.
Mr Ellahi is a stock trader. His job involves studying company financials, sniffing around for market-moving information, ringing up clients and telling them to buy or sell stocks to make a profit on their investments.
He’s stuck around for 30 years in a line of work that’s highly competitive. Hardly a few thousand professionals help hundreds of thousands of investors buy and sell shares worth roughly Rs25 billion a day on the country’s only stock exchange.
I sat down with him recently to learn what exactly stock traders do and how they do it.
“It’s a target-oriented job. A lot depends on one’s aptitude. Things look rosy from afar. But very few have what it takes to be a successful trader,” said Mr Ellahi who heads the traders’ team at Next Capital and also sits on its board of directors.
“One should be willing to spend countless hours trying to understand the investing landscape and learn the skill. It’s not a nine-to-five job. It’s like running your own business.”
Trading is a high-burnout profession. Bad traders don’t survive. Too many professions allow their members to separate results from efforts. From bureaucrats and economists to academics and journalists, incompetent people can fake competence for years and come out on top. But it’s impossible to separate labour from the fruits of labour in case of a trader. Their performance is measured against benchmarks for every single trade on monthly, quarterly and yearly bases. What they deliver has a direct and observable bearing on not only their client’s portfolio but also their employer’s income.
Like your own business
A young trader usually joins a brokerage house on a salary but moves to a salary-plus-commission package in about five years, Mr Ellahi said. Reason? Individual investors are tribal in nature. Their loyalty is with the trader who they speak to every day, not the limited liability company with a broking licence.
“You bring your own clients to the brokerage and manage their portfolios. Whatever brokerage revenue you generate, you share it with the company,” said Mr Ellahi who worked for 17 years at Bhayani Securities before joining Next Capital in 2011.
“Until recently, it made little difference which brokerage house you were associated with or how big that broker was. All brokerages had a similar setup. Almost all of them sat in the same building in identical rooms right next to each other,” he said.
Brokerage houses earn by charging their clients a 0.15 per cent fee on the traded value with a floor of three paisa per share. In addition to their monthly salaries, senior traders get a pre-negotiated percentage from the brokerage revenue they generate over and above their sales targets.
“All that matters for a trader is the number of clients and the size of their portfolios. The rest is immaterial,” he said.
Traders are supposed to handle institutional clients as well as retail and high net worth individual (HNWI) investors. Institutional clients like banks, insurance companies and mutual funds are not trader-centric though. A medium-sized brokerage house employs three to six traders to serve institutional clients, according to Mr Ellahi. They invest in the stock market using multiple — sometimes up to two dozen — brokerage houses at a time.
But HNWI investors tend to stick with the trader of their trust. The number of traders dealing with retail and HNWI clients goes up and down in line with the volume of business generated. A brokerage house keeps adding traders for this segment as long as it’s getting incremental revenue.
“You cultivate clients over a long period. You can’t earn their trust in six months or even a year. It takes a lot more time and effort,” he said.
Analysts vs. traders
Although the stock market opens at 9:30am, Mr Ellahi says his work begins at 6:30am on weekdays. The first order of business is newspaper reading. He has already glanced at four English newspapers by the time he walks into the office meeting room for his daily 8:45am huddle with the research team (whose workday begins even earlier).
“Sales and research teams have a spirited meeting. We discuss all kinds of news. Sales staff have their queries and research people give their input. Our homework is complete by the time we sit on the dealing desk before the start of trading. By that time, we have a fairly good idea which direction the market is going to take,” he said.
So does the client approach the trader or the other way around? “It depends in case of individual investors. Some expect you to approach them, the rest prefer otherwise,” he said.
However, it’s a different ball game for institutional clients. “Institutions never call you. You ring them up. You give them all kinds of updates as soon as they become available. They may already know half of that information from other sources. But you call them anyway and share your assessment. They have so many brokers at their beck and call. It’s very competitive. You have to run after them to get their business,” he said.
It’s common for traders to be at loggerheads with their own research analysts. Chasing after clients to meet their sales targets, traders thrive on the rush of adrenaline. In contrast, research analysts tend to be the unadventurous nerds with a proclivity to err on the side of caution. Analysts are conservative. Traders are aggressive.
“There’s often a difference of opinion. Research is always by the book. It needs logic. It doesn’t take into account the market momentum,” he said.
Analysts need fundamentals to justify their research. But traders put a premium on market sentiments. “A long-term investor always pays more attention to what research says,” he said, admitting that short-term investors are prone to fall for the dealing desk’s opinion.
The stock market is overheating these days, with unusually high volumes and rapidly rising share prices. What should a retail investor do to avoid getting burned? “It’s a high risk, high return business. They should cross-verify their trader’s opinion. If they think share prices are higher than their fundamental valuations, they should book profit and exit the market.”
Published in Dawn, February 28th, 2021