Is The Brokerage Industry On Death Watch?
Written by Rebecca Lipman
Thanks to a negative and incredibly low volume trading period, CNNMoney says hundreds of small firms are on death watch. Simply put, less trades means there are less fees and commissions a firm can take in. After long spells, a company can cease to remain profitable.
Trading volume is the number of shares or contracts that have exchanged hands in a given period, usually over a day's trading.
Trading volumes have mostly been on the decline since 2007, and already three small but well-known firms (WJB Capital Group, Ticonderoga Securities and Kaufman Brothers) have had to shut down. It remains to be seen how many more firms will be forced to close their doors.
"When some of these firms start to have problems, everyone starts looking for the next one," said Robert Moore, CEO of Concept Capital to CNNMoney. Soon clients that would otherwise trade with these firms decide to wait and see before trading with them. The delayed trades are another nail in the coffin.
Big Vs. Small
Larger institutions usually have their hand in a few moneymaking jars. When one commission-generating venture starts to slow they can simply put more emphasis on the more profitable projects.
Not so with small boutique firms that use commissions as their sole or majority revenue source.
"Currently, there are 4,066 brokerages with fewer than 150 traders, according to brokerage regulator Financial Industry Regulatory Authority (FINRA). Because of their small size, those are the ones in the most precarious position."
Interactive Chart: Press Play to compare changes in market cap over the last two years for the first nine stocks mentioned below.
Business Section: Investing Ideas
The decline of small and boutique trading firms is an indication that Wall Street is shrinking. Supply has well outstripped demand. And although trading volumes may come back up, it may be too late for many of the weaker firms.
With that in mind we compiled a list of the smallest national investment brokerage firms trading on the US exchanges starting with firms with market caps above $50 million. Do you think these companies should be on your watch list?
Use the following list as a starting point for your own analysis. List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. FXCM Inc. (Nasdaq: FXCM): Provides online foreign exchange (FX) trading and related services to retail and institutional customers Worldwide. Market cap of $166.30M.
2. JMP Group Inc. (NYSE: JMP): Operates as an investment banking, asset management, and corporate credit management company in the United States. Market cap of $169.86M.
3. Cowen Group, Inc. (Nasdaq: COWN): Cowen Group, Inc. is a publicly owned asset management holding company. Market cap of $331.71M.
4. Ladenburg Thalmann Financial Services Inc. (NYSE: LTS): Provides a range of financial services primarily to corporate and institutional clients, and high net-worth individuals in the United States. Market cap of $393.45M.
5. Piper Jaffray Companies (NYSE: PJC): Provides investment banking services, institutional sales, trading and research services, and asset management services worldwide. Market cap of $462.38M.
6. GFI Group Inc. (Nasdaq: GFIG): Provides wholesale brokerage, clearing, electronic execution, and trading support products for financial markets in the United States and internationally. Market cap of $588.35M.
7. Interactive Brokers Group, Inc. (Nasdaq: IBKR): Operates as an automated global electronic market maker and broker. Market cap of $689.02M.
8. BGC Partners, Inc. (Nasdaq: BGCP): Operates as a financial intermediary to the financial markets specializing in the brokering of various financial products. Market cap of $842.71M.
9. MarketAxess Holdings Inc. (Nasdaq: MKTX): Operates an electronic trading platform that enables investment industry professionals to trade corporate bonds and other types of fixed-income instruments. Market cap of $1.24B.
10. E*TRADE Financial Corporation (Nasdaq: ETFC): Provides online brokerage and related products and services primarily to individual retail investors in the United States. Market cap of $2.60B.
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Disclosure: Kapitall's Rebecca Lipman does not own any of the shares mentioned above.