The Secret Broker: Pump and dump, ’80s-style. Welcome to the Penny Dreadful Fat Boys Lunch Club
The Secret Broker
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
Numbers played a big part in my career and I first really got into them when I was learning computer programming at school.
Binary numbers were very simple and yet very complicated and we did not have laptops or anything like that at the time.
In fact our school didn’t even have a computer, so we had to punch little holes into cards and then send them off to the local university to see if our programs worked.
One hole punched in the wrong place and the program would not work.
The cards worked by whizzing past a light and the punched out hole would allow the light through and instruct the computer what to do.
If you instructed it to repeat itself, then it would become an algorithm.
So there you go. I was building binary based algorithms 40 years ago, by hand.
It wasn’t until I joined a broking firm that money meant time and computers could help speed things up.
In those days, everything was settled via cheques and at the end of every settlement period, the firm’s computer would produce statements with cheques to match, by the thousands.
We would spend hours in the post room, on a Friday night, stuffing all these statements and cheques into envelopes, to be sent out that night to all the posh clients around the UK.
So we would be handling tens of millions of pounds every two weeks or so and in those days, commission rates started at 1.5%.
A £1m order could generate £15,000 (A$27,000) in commission.
Today, at the 0.2% rate that I now get charged, commission would only be £2000 (A$3600). Everything is settled electronically, not a cheque in sight.
By the time I had my own booking clients, rates had come down to 0.5%, so a £1m order would generate £5000 in commission and I would get 45% of that amount or £2250.
Working out percentages for me is very easy because money was involved and I needed to calculate every day if it was steak for lunch or a cheese sandwich.
So when I came to Australia, the trading floor had been closed down and everything was screen-based.
I soon learnt that leveraging the percentage returns in the penny dreadfuls was extremely useful to my bank balance and more than made up for the (now) lower commission rates.
It used to be that the lowest share price allowed was 1/2 a cent and the lowest quote you could ever see was zero bid, 1/2c offered.
The next quote up would be 1/2c to 1c and then 1c to 1.5c and so on to 10c.
This is where it really got interesting as above 10c, a stock would be quoted in 1c movements. If you could get a stock from 8c to 10c, then the next move up would be 11c.
The real trick, as my wallet learnt, was to get a stock from 8c to 12c in size. That’s a 50% movement.
I had to learn all of this the hard way, as being a forced lunchtime vegetarian was making me too thin. I was verging on unable to jump up from my desk in the dealing room and bark out an order without my loose trousers falling down.
I needed to fatten up.
What took me a year or so to realise was that, when I was presenting a switch out of say, BHP, and into RIO, to a big fat fund manager, I had my percentages all wrong.
It wasn’t the fact that I was logically proving to him that RIO would outperform BHP by 10%. No, no, no.
What he really wanted to know was whether I ‘had an 8 cent special for his wife’s trading account?’
And that was it. I now had to completely change tack and start to wine and dine as many directors of penny dreadfuls as I could.
To get involved with a dodgy stock trading at 10c would require a plane trip to Perth, lunch at Indiana’s and back to the office with a signed mandate to raise them some money at, you guessed it, 8 cents.
Then the games would begin.
We would push the stock up from 10c to about 13c to 14c and then knock it down to 10c on rumours of a capital raising. We would place as much stock as possible without needing a shareholders meeting, at 8c to various clients, including Mrs Fund Manager’s account.
A well worded announcement would be released and the words ‘oversubscribed placement’ included. Chuck in some rumours that even some fund managers had taken stock ‘PA’ because the story was so good and bingo, up she would pop, past 10c.
Next stop, 14c.
We’d all be out around 12c (as you all ways needed to leave something on the table for others) and the next lunch would involve presenting a cheque to the fat fund manager with his wife’s 50% gain.
After lunch, the fund orders would flow in, without a presentation or research note in sight. My trousers soon started popping a button when I stood up.
Ah. Happy days.
As time went on, certain barriers were put in our schemes but we could always navigate around them and as commission rates kept falling, it got to the point where it was better to leave the industry and become your own client.
These days it’s called ‘Pump and Dump’. But in my day it was called ‘Stump and Rump’ where what you stumped up became 50% higher and led to a proper Fat Boys lunch.
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