Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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August 9, 2006

Pressure on Brokerage Profits to Continue: IBM Reports

By Michael Scotti

Increased transparency and the speed of information will further pressure profits for broker-dealers over the next 10 years, forcing firms to recreate themselves as they look to add value to clients in new ways. That's according to an IBM Business Consulting Services survey that interviewed 300 firms in the financial markets sector worldwide.

The survey, "The Trader is Dead, Long Live the Trader," predicts a decline in agency trading across all asset classes. Brokers will need to increase their risk profile-through client capital commitment and proprietary trading-in order to remain as profitable, according to the survey.

Most of the pressure on commissions in the U.S. has already taken place in cash equities, according to Suzanne Dence, a senior consultant at IBM Consulting Services, who co-authored the report. Derivatives and fixed income will see similar pricing pressure that equities have already experienced, she said. Still, brokers need to be innovative to add value. "Look at what Lehman Brothers did putting its star analysts on the equity trading desk," Dence told Traders Magazine. "That is the type of client-centric move that we are talking about." Firms will become more client focused and less transaction oriented, the survey reported. The brokers who understand institutional clients best and service their needs, will be the winners, Dence said.

By the year 2015, brokerage execs surveyed expect a major reduction of head count in trading-just one-tenth of the current number of traders in all asset classes will survive the cut. Longer term for equities, Dence said, global brokerage firms are asking if cash equities will be a future loss leader.