Boiler Room Diaspora

diaspora (di·as·po·ra)
noun dī-ˈas-p(ə-)rə, dē-
the movement, migration, or scattering of a people away from an established or ancestral homeland

It’s almost over.

It’s ending with a whimper, not a bang. One by one, the last of the cold-calling retail brokerage firms are fading away. The game that Jordan Belfort invented twenty years ago had managed to adapt since Stratton Oakmont’s shuttering, but even adaptation has its limits. These firms are going away. 

Starting a cold-calling brokerage firm used to be easy – all you needed was the Lehman telemarketing script, a b-d license and a room full of testosterone-poisoned young men from Long Island or the outer boroughs of New York City that you could manipulate into thinking that they had any ability to make “clients” money. The hard part was keeping the shop open once the arbitration awards and investigations began piling up.

Given the horrifically conflicted business model and abominable standard of care, I’m actually surprised any of these firms have lasted even this long. But there are still a few alive and kicking, and those brokers who are still playing continue to find each other in these last refuges. They all know each other from in and around “the business.” They can trace their lineages back to the same “senior brokers” for whom they once cold-called or “popped new accounts.”

The few brokers who haven’t racked up too many regulatory disclosures are somehow able to keep finding midwesterners or southerners who still answer a landline telephone and are too polite to hang up. Somehow, these brokers are still persuading people to send them money to churn.

But it’s getting harder.  The internet has made it so everything being said during a stock pitch can be verified in seconds. The cost of trading is now zero, which makes it difficult to justify 3% commissions and outrageous “handling” fees on trade confirmations. And besides, people just don’t pick up the phone anymore. Hard to “pound” a prospect or “take him to the mat” over text or email. Telemarketing of stocks involves the kind of emotional give-and-take that requires a phone conversation – and who has time for that these days?

The Wall Street Journal just did a massive analysis of all the broker-dealers that have been shutdown over the last seven years using publicly-available disciplinary records. The reporters were able to quantify this diaspora of brokers leaving and then finding each other again as the industry spread and then shrank back down. It’s truly fascinating…

The Journal’s analysis reveals some of the nationwide migratory patterns of brokers associated with firms having troubled regulatory records. These brokers often remain in the industry after working at firms expelled by regulators, in some cases after the brokers accrued numerous arbitration claims or declared multiple bankruptcies.

To identify firms Finra has expelled, the Journal reviewed 105 monthly disciplinary reports the regulator published since 2005. Through the end of 2012, it said it had expelled 173 firms for problems ranging from a firm’s failure to pay regulatory fines to fraud involving individual brokers.

At least 5,054 brokers who worked at these defunct firms were still licensed to sell securities earlier this year, the Journal analysis shows. Of those, 610 had worked at more than one firm Finra had expelled.

“Migratory patterns” is a polite way of putting it. I’d phrase it differently. I’d call it the Last Stand. They’re on the run now with very little reason for the business itself to even exist. The last bastions of brokering, even if they could hire whoever’s left, will be under more scrutiny than ever before and will likely not be able to withstand it.

Susan Axelrod, Finra’s executive vice president of regulatory operations, told the Wall Street Journal that “We are watching broker migration with a laser focus.” When your business, at it’s most basic, is harmful to your customers and practically guarantees their eventual dissatisfaction, a “laser focus” is the very last thing you need.


More Than 5,000 Stockbrokers From Expelled Firms Still Selling Securities (Wall Street Journal)

Read Also:

Land of the Lost (TRB)



For more about the rise and fall of the retail broker, please read my book Backstage Wall Street.  If a young family member (son, nephew, etc) or someone you know has found himself “training” at one of these predatory cold-calling hellholes, please pass the book on to them. I’ve been told by at least a dozen young men that it’s the thing that saved them from going down the wrong career path. This is perhaps the biggest compliment I could ever ask for and I’m always glad to hear that I’ve made a difference by telling the truth.

Backstage Wall Street (Amazon)

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