Many broker-dealers and agency brokers do business abroad, but not every broker can execute trades in the most-obscure markets, such as Oman, Benin and Burkina Faso. Auerbach Grayson, a N.Y.-based agency broker, boasts that executing in the most emerging of markets is its specialty. Advanced Trading's Senior Editor Glenn Curtis sat down with cofounder David Grayson to find out how the firm is able to execute trades in unstable markets, what goes into finding a local partner and - the burning question - why trade in these often volatile and illiquid markets anyway?
The logistics of investing overseas can be difficult. New York-based agency broker Auerbach Grayson & Co. would know - it does business in 98 countries around the world. With its roughly 60 employees - mostly traders - the firm has carved out a unique niche for itself. Beyond conducting business in a large number of familiar countries with highly liquid exchanges, such as Germany and France, it also has entered an array of obscure markets, such as Benin and Burkina Faso (both in Africa), and Oman (in the Middle East).
Typically, only the large global brokers, such as Merrill, UBS or Goldman, have even considered delving into such markets. But Auerbach Grayson, in spite of being a relative newcomer (having opened its doors in 1993) wants to compete with these larger, better-financed players.
One needs just a few minutes at the firm's midtown headquarters to gather that David Grayson is a worldly man. He rattles off the names of countries and local contacts in remote regions of the globe with ease. He is a relentless traveler, bent on constantly picking up new brokerage partners in emerging markets. Grayson's goal, he says, "is to be value-driven, and provide quality research and data for the client through a first-rate local broker."
Grayson's partner, Jonathan Auerbach, mans the home office, working the phones and trying to grow the firm's client list, which includes an array of mutual funds and hedge funds - all of which, for competitive reasons, wish to remain anonymous. However, Grayson reveals, clients typically have assets ranging from $100 million to several billion dollars and are a mix of both value-driven and speculative investors. Both partners have lengthy Wall Street experience: Auerbach served as a managing director at Dillon Reed and as chairman of Cresvale Group (a London-based derivatives firm); Grayson previously was a managing director at ABN Amro.
Grayson is quick to lay out the firm's strategy: Research emerging markets, make contact with a number of local brokers in the target country, visit those brokers and then solidify a deal with one local house, which will provide research and execute trades (equity/debt/derivative) on behalf of Auerbach Grayson's clients. But why enter such obscure markets?
Building Local Relationships
According to Grayson, client interest typically drives the firm to investigate a given market. But interest alone isn't the determining factor. The firm's ability to solidify a relationship with a reputable local broker is the key to whether or not it does business in a market. Grayson adds that the firm also will enter a market if it thinks trading activity will develop over time. Initially, he says, demand in certain markets (e.g., the Ukraine and Egypt) starts off slow, but can increase markedly as fund managers look for increased overseas exposure.
And because the firm isn't erecting brick-and-mortar locations when entering a given market, it isn't incurring huge start-up costs, Grayson notes. The only capital truly at risk is the money expensed in the due diligence process of picking out a local broker, he explains. Other factors, however, including revolution and war, have slowed business at times, particularly in places such as Lebanon and Iraq, where trading can be sporadic or even nonexistent when violence breaks out.
The real risk of entering and maintaining a presence in a given market, Grayson says, is time. Someone from the firm always is on the road, taking clients to see its overseas brokerage partners and listed companies in a given market. Grayson adds that, "Establishing and maintaining these types of relationships is difficult, and it's one of the reasons why the firm's business model isn't being copied."
Grayson acknowledges the competitive presence of the large global brokers in many of the markets in which his firm also participates. But, he says, these firms are banking-driven, and they aren't as likely to enter some of these markets, or spend the money to draw order flow, unless they see an underwriting opportunity down the line. "They also aren't likely to send their clients to meet and tour companies with a local broker," he asserts. Neither Merrill nor UBS could be reached for comment for this article.
Grayson explains that his firm hopes that if it can get into a market early and obtain a foothold through a local partner, its fund clients will reward it with order flow, and word of mouth will generate additional business. The firm's local presence, he adds, offers a competitive advantage.
Because Auerbach Grayson is considered a registered broker-dealer under SEC regulation 15A (6), it is allowed to distribute foreign-based research directly to its clients. "The majority of global brokers rely on in-house analysts to conduct research in foreign markets," Grayson points out. "We find that the local analysts know these markets much better. Plus, if anything goes wrong at an off hour (say, Sunday at 5 p.m.), ... [we] have access to many of these analysts' home phone numbers or personal e-mail [addresses]." It goes without saying, however, that most other agency brokers would have similar advantages.
Grayson concedes that it sometimes is difficult to deal with the different cultures and rely on these firms for executions and research. But, he points out, joining all of the remote exchanges, setting up offices and the compliance requirements associated with membership would be cost-prohibitive and would be reflected in commission billing.
The firm, Grayson continues, makes its money on an agency basis. Commissions, he relates, range anywhere from "15 to 20 basis points, to 2 percent or 3 percent based on the market." Auerbach Grayson does not make markets, hold inventory, underwrite or write research, and trade settlement typically takes place with the client's custodian bank, Grayson adds.
Grayson believes that because the firm establishes a partnership with just one broker in each country (as opposed to the several brokers with which other major players often solidify deals), "The firm gets better executions." While Grayson acknowledges that other agency brokers offer similar service, few have a footprint in nearly as many markets, he contends.
Besides the major global brokers, Grayson identifies two firms, both with offices in New York, that have similar business models: Sal. Oppenheim, which does business in some 20 locations throughout Europe and is particularly well-entrenched in Germany; and Nordic Partners, which, as its name suggests, does business in Sweden, Norway and Finland. Neither firm would comment on its operations for this article.
Auerbach Grayson relies on two proprietary software systems to conduct business. The first allows two confirms to be generated for each trade - one to the in-country broker executing the trade in the local currency and the other to the client in his/her native currency. The second application sifts through foreign research and enables the firm to provide clients with up-to-date information on a particular industry or company. "If a client is interested only in Asian financial institutions, we can collate the research and send it by e-mail to the client," Grayson explains. Because of the proprietary nature of these systems, Grayson declines to elaborate on details of the software.
So what lies ahead for Auerbach Grayson? For competitive reasons, Grayson declines to specify goals pertaining to the number of clients retained by the firm or revenue targets. But, he says, "There are probably 130 countries with public markets, and we would like to be represented in each."