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CMC Markets
An AVO, staff cuts and a trophy mansion – it’s all happening at CMC Markets
Jill Fraser and Toni Case - September 04, 2008
 An apprehended violence order, an office closure, staff cuts and a trophy mansion – CFD provider CMC Markets has been in the headlines of late but for all the wrong reasons.
No broker wants bad news in a jittery market.
Staff cuts at CMC Markets have been across the board – Sydney (8%) and London (10%). CMC Markets also shut its Perth office last month less than two years after opening it.
So why so much drama at CMC Markets?
Managing Director David Trew says that the staff cuts are “simply prudent financial management.”
“You’d have to go a long way in the market at the moment to find any company that’s not doing the same thing,” he says.
It’s true, market volatility and a string of company mishaps, including the likes of collapsed Aussie stockbroker Opes Prime and beleaguered broker Tricom, hasn’t made things easy for the broking industry in general. And when the easy money isn’t so readily milked from market any more, retaining and attracting new investors becomes a little trickier for every player in the market.
Trew says recent staff cuts in London were in reaction to current market conditions.
But he argues that the 17 job cuts in the Sydney office at the end of July “weren’t all redundancies”. Some were “vacancies that we simply neglected to fill,” he says.
As CMC Markets slashes staff, Trew’s personal wealth has reportedly ballooned. According to a report investigating the happenings at CMC Markets by The Australian newspaper in June, 35-year-old Trew splurged $25 million on a trophy mansion in Sydney’s most expensive street, Wolseley Road, Point Piper - a street where the Murdochs, the Lowys, Malcolm Turnbull, John Symond, Chris Corrigan and the late Rene Rivkin have hung their hats.
His rise in personal wealth has been, by many standards, fast. Seven years ago, CFDs didn’t even exist in Australia for the retail punter.
However, over the accompanying 6 years, CFDs became the fastest growing financial instrument in Australia - and CMC Markets blossomed from being a relatively unknown UK player to one of the most visible brokers in Australia.
But not everyone appears to be in the same boat. Take one disgruntled CMC client who claims to have lost tens of thousands of dollars with CMC Markets. According to The Australian, angry phone calls, office visits and a series of threats culminated in CMC Markets slapping an Apprehended Violence Order (AVO) on the disgruntled client.
CMC Markets, which has the lion’s share of the CFD market, is fast becoming a household name after picking up sponsorship of Channel 9’s finance reports. The previous sponsor CommSec dumped Channel 9 “to focus more on advertising”. The deal is rumoured to be worth $3 million over the coming year.
CMC Markets is well-known for its market-maker model of CFDs. Market makers create a synthetic CFD market, which aims to mirror the underlying market. This means that when clients buy and sell CFDs with a market maker, the trades are not input through the Australian Securities Exchange (ASX). Rather, they are simply a contract between the client and the broker.
The market maker makes money on the brokerage received and also from not hedging against certain clients or certain trades. While market makers will hedge some trades, most do not hedge 100% of the time.
But not all CFD providers run this type of model. The Direct Market Access (DMA) school of CFDs input every buy and sell order directly into the ASX. In effect, they are 100% hedged against a client making or losing money on their books. And bids, offers and spreads are therefore identical to the underlying market – removing any ability for the CFD provider to alter the spreads at their discretion.
Trew strongly denies the suggestion that staff cuts are a result of problems at CMC Markets. “We haven’t done anything earth-shattering in the business,” he says. “All we’ve done is get back to basics, pay a lot of attention to how we spend money and drive any kind of growth initiative that we’ve got on the boil.”
Instead, Trew points to a 64% jump in profit to just under $100m for the fiscal year 2007-08 for the broker. He insists that the staff cuts were no more than a fat trimming exercise. And further staff cuts are not anticipated.
According to Trew, the closure of CMC’s Perth office last month occurred because the majority of the company’s business is on the Eastern seaboard. “The Perth market is geared towards mining shares and a lot of those shares are small companies that are very speculative in nature and we don’t offer trading in those types of services,” says Trew.
He refers to the integration process of buying Andrew West Stockbroking as a “dream ride.” Although market volumes have declined, CMC structured the transaction in such a way that it could recover a significant amount of synergies from the deal, he says.
Trew is optimistic about CMC Market’s long-term prospects - maintaining that CFDs cater for a growing trend in clients to be more self-directed.
However he admits that a few months’ back he was concerned about a potential slowdown ahead. Clients are “not holding positions as long and they’re more inclined to trade on the downside,” he admits.
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
More articles from this edition of CompareShares:
Stocks: Stocks to stay clear of in this current market
CMC Markets: An AVO, staff cuts and a trophy mansion – it’s all happening at CMC Markets
Economics: Does raising rates really cut inflation?
Stocks: Which stocks are investors buying, selling and holding this month?
Fundamentals: Take a look at healthcare leader CSL
Property: Mortgage index shows fall in house sales
Economics: Deficit at $717m in July
US: Slow growth, high prices hit US economy
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