A three-year decline in trading volume and investors’ continued migration to computer-driven and algorithmic trading may mean the end of an iconic fixture on Wall Street: the small brokerage firm. Over the past year, numerous smaller trading firms either scaled back or closed their doors altogether.
These trading houses, at one time legion on Wall Street, hark back to a time when roomfuls of aggressive brokers endlessly worked the phones to ply their money-manager contacts with investment advice in the hope of securing some small amount of trading business in return. Now, the relentless forces of dropping trading volume, especially in U.S. equities, and the loss of business to more popular electronic trading platforms have contributed to the continual grinding down of firms’ capital base, choking off many of these smaller firms.
The average daily volume for U.S. equities has fallen 36 percent since 2009, and volume hit just 6 billion shares traded in the third quarter, the lowest level since the onset of the financial crisis. Worse yet from the brokers’ perspective is the toll all this is taking on commissions. Indeed, the average fee to trade a share of stock fell 31 percent over the past three years, according to Investment Technology Group.
The end result of all of this was not surprising: In early September, Nomura Securities International became the biggest-named casualty as it folded its equities trading groups into Instinet, an electronic broker that Nomura had purchased in 2006. The move was part of a larger consolidation plan by the Japanese bank to seek $1 billion in cost reductions worldwide.
While both a dismal trading environment and a growing prevalence by investors for electronic execution contributed to the closing of Nomura Securities’ equities trading group, these twin pressures were not unique to that situation.
At the beginning of 2012, both WJB Capital Group and Ticonderoga Securities closed their doors after capital shortages hobbled their trading efforts. And Newedge shut down its cash equities and exchange traded funds desks in early September.
In October, ThinkEquity, the San Francisco-based investment bank, shuttered its stock-trading business, while Rodman & Renshaw, owner of brokerage Hudson Holding, said it would stop trading because of lack of capital. Throughout the past year, other smaller brokerages, such as Auriga Holdings, Pritchard Capital Partners, Kaufman Bros. and Momentum Trading Partners have either closed down or shuttered some operations, idling brokers, traders and staff.
And the pain isn’t limited to the small fries. Big boys like Morgan Stanley, Citigroup, Bank of America and Goldman Sachs have been quietly trimming their brokerage units this past year, mostly in equities trading.
“It is definitely a challenge for some of the smaller brokerages, especially those without the scale to get them through the tougher times,” said Packy Jones, chairman of JonesTrading Institutional Services LLC, a brokerage based in Westlake Village, Calif.
Jones said he expects to see continued difficulty and further consolidation in the smaller brokers through the first half of 2013, if not through the entire year. “It’s very sad to see these small boutiques shut their doors,” Jones noted. “These smaller players are what make our business great.”
