This is a post that I made shortly after the surprise announcement of the MF Global collapse, in which many investors have (to this day and quite possibly forever) lost a good deal of their money which they had assumed was safe at one of the world’s largest derivatives brokers. Although this apparently happened because MF Global violated rules against commingling customers’ assets with the firm’s assets, thereby circumventing the normal firewall process which should have protected client assets against any of the firm’s trading losses or financial misdealings, the point of this post is that you might possibly be able to catch wind of any red flags with a firm that you do business by keeping an eye on the company’s stock in relation to other companies within the brokerage sector (see below):
Posted by: rp on the 1st of Nov 2011 at 02:10 pm
here’s a chart of MF Financial. looks to me like there were two red flags:
#1) it was a sub $5 stock since early sept of this year. stocks under $5 are usually considered highly speculative and actually banned from ownership by prospectus of many mutual funds. fidelity even runs (or used to??) a fund called the “low-price stock fund” that specialized in buying sub $5 stocks… an equity version of a junk-bond fund, if you will.
2) this chart below shows how well MF was correlated to the market in the past but notice the recent divergence between the SPX (blue line) and the XBD (broker-dealer index, white line), just before the sudden BK announcement.
funny how these things happen..
Posted by: rp on the 1st of Nov 2011 at 01:52 pm
– i sure wish i new more about the potential risks in having money with various brokers. like you, i don’t have all my eggs in one basket. i have my trading acct at IB and IRA’s and Coverdell ESA’s scattered around Fidelity and Scottrade. matt’s post below makes me feel better about IB but if the $%!& really starts to hit the fan, hopefully some members can post what they know or come across on the financial strength of various brokers. regardless of what you read, the most accurate measure of a firms financial strength will be the stock price. i know fidelity is not publicly traded but IB (symbol IBKR) as is ameritrade (AMTD) and i believe (TD) is still their parent co or majority owner. tradestation was trading under the symbol TRAD but was recentlyly acquired by Monex Group, which is a japanese co. that trades on the tokyo stock exch. i forget who bought up E-Turd from the gutter in the wake of the last bear market but again, best way to spot potential trouble for your broker is to keep an eye on the stock, if they trade publicly. insiders always get out of the way of a train wreck long before it happens…just ask the Man with a Tan (Angelo Mozilo/Countrywide).