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Update from Australian: http://www.theaustralian.news.com.au/business/story/0,28124,24613351-5012439,00.html
David Trew leaves CMC Markets after overhaul
DAVID Trew, the 35-year-old behind the country's biggest and most controversial contracts for difference provider, CMC Markets, has left his high-flying job as part of a major overhaul of the company, which includes significant job losses to be announced over the next week.
The changes are the latest in a string of casualties in Australia's stockbroking and derivative trading sector as investors dry up, margin calls abound and their skinny balance sheets and high leverage start to catch up with them.
They also come as another contracts for difference (CFD) provider, First Prudential Markets, is being investigated by ASIC over multiple suspect transactions involving possible market manipulation.
A spokesman for First Prudential Markets confirmed the business was in talks with ASIC about certain share trades but refused to comment further.
First Prudential is a prime broking client of Merrill Lynch, which it uses to hedge its over the counter (OTC) CFD transactions, offering massive leverage to retail clients on CFD positions.
A report written by Rebecca Urban in The Australian on October 11 stated that Merrill Lynch was behind a series of single-share trades in at least 20 small companies that were executed late in trading on September 30 -- the last day of the first quarter of the new financial year.
It is understood Merrill Lynch was acting on behalf of First Prudential. In almost all of the transactions, one share was purchased at premium prices and had the effect of boosting the individual stock's closing price on the day. In some instances the share price rose as much as 75 per cent as a result of the CFD trade.
First Prudential is a small CFD provider tha came into being when a team of people from other CFD providers, including CMC, decided to set up their own business.
But CMC remains the country's biggest trader of CFDs -- one of the riskiest financial instruments on the market. They are banned in the US and described by the Australian corporate regulator as more dangerous than a flutter on the horses.
CMC staff were told about Trew's departure, along with an announcement that non-client-facing support functions would be lost, at a meeting at the Intercontinental in Sydney at 2.30pm yesterday.
Trew is understood to have attended the meeting yesterday but packed up his office last Friday.
A decision was made at head office in London a few weeks ago to restructure the reporting lines and reduce Trew's role. The Asia-Pacific region no longer reported to Trew but went directly through London. Trew has been replaced by chief operating officer Barry Odes.
CMC currently has 240 staff in Australia and it is not known how many of these will lose their jobs. What is known is that the cuts will leave CMC as essentially a sales and service business, with IT, finance and other areas expected to now come out of London.
Trew made a fortune from the volatility that has engulfed the financial system this year. He hit the headlines when he bought a $25 million waterfront house in Sydney earlier this year.
He hit the headlines again in June when he took an apprehended violence order out on one of his clients who became frustrated at all the money he had lost on CFDs without fully understanding how they worked.
CFDs are targeted at unsophisticated retail investors through magazine and television ads. They allow investors to bet on rises and falls in shares and indices using borrowed money but, most importantly, earnings and losses can be unlimited.
They are outlawed in the US by the Securities and Exchange Commission because, unlike most other securities such as shares and options, they are traded "off market", which is largely unregulated. The CFD industry estimates that more than $400 billion of CFD trades are carried out each year in the OTC market, and represent about 15 per cent of trades on the equities market.
Despite the recent ban by ASIC on short selling, market makers such as CMC have been able to hedge their position, enabling them to continue doing business as usual.
The concern is that much of what CMC and other CFD providers do is in the OTC market which lacks transparency and regulation.
To put its size in perspective, the OTC market turned over $79.5 trillion in the year to June 30, up 0.5 per cent on the previous year after a 14 per cent rise in 2006, compared with $42 trillion for the total exchange-traded markets, which includes the ASX and the Sydney Futures Exchange.
It is in the OTC market that most of the share price manipulation happens.
Many CFD operators use a similar model to that of collapsed stockbroker Opes Prime, which leaves its clients as unsecured creditors. Some CFD providers utilise client money held in segregated accounts to facilitate hedge transactions in their own name with their prime broker lender and this money is mingled with moneys from other clients of the prime broker, which often includes high-risk hedge funds.
For this reason, it's imperative retail clients read their Product Disclosure Documents closely to ensure they know their position in the event of a catastrophe. |
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