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10/27/15

Investment Brokers: The Brokerage World Is Changing, Who Will Survive? - by Andre Cappon and Stephan Mignot,

Once upon a time, being a stockbroker was comfortable, genteel and lucrative.

In the “old world,” brokers, as members and owners, controlled the exchanges. Exchanges were run as quasi-non-profit clubs or utilities to support their members. Exchanges had monopoly on liquidity and brokers controlled access. By providing investors access to markets, brokers earned commissions and also received trading fee rebates from the exchange. A long time ago, brokerage commissions were even fixed (remember).

Brokers thus competed on the basis of service and relationships, rather than price.

The introduction of negotiated commissions in the U.S. in 1975 (eventually followed by most other markets in the world) marked the beginning of constantly increasing competition and challenges for brokers. In the last 10-15 years, this process accelerated.

Capital markets experienced a revolution driven by technology and radical change in market structure.

Electronic trading dramatically increased trading volumes and liquidity and slashed the cost of intermediation and broadened access to markets. Exchange demutualization led to a dilution of the status of exchange member.

 Access to liquidity was “democratized”.  Liquidity became fragmented among exchanges, alternative trading platforms, lit and dark pools and so on. Exchange “specialists” (market-makers) disappeared.

In many ways, brokers and exchanges now compete with each other: brokers may internalize order execution, they may use alternative exchanges or dark pools; established exchanges offer “direct market access” (DMA) and are occupying increasing space in the investment process, both pre-trade and post-trade.

The US and UK markets – New York, Chicago, London – are pretty much the “laboratory” for the securities industry worldwide. We shall draw on their experience to illustrate the evolution of the securities industry and extrapolate to other geographies.

The “sell-side” securities industry (i.e. the brokers), has been experiencing deteriorating economics, due to   pricing pressures, increasingly stringent regulation, and changes in market structure.

Life has become very tough for brokers.

Read more: The Brokerage World Is Changing, Who Will Survive? - Forbes

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