Ripple effect
Insight Q3 2015

The number of broker-dealers in the US has decreased dramatically since the financial crisis of 2008. At that time, there were approximately 5,500 registered broker dealers. Today, less than 4,000 remain.

A consolidated industry

While many consolidated to gain economies of scale during challenging times, others simply shut their doors due to lack of activity and clients rattled by the downturn in the markets. The retail investor has yet to return to the securities markets with the same enthusiasm seen during the late 1990s.

Although market indexes have reached historic highs in recent years, the volumes that drive transaction processing remain sluggish. This has had a ripple effect on the universe of service providers to the broker dealer community, namely the clearing agencies that process trades.

Along with a consolidation of broker-dealers, the industry has witnessed clearing firms that service these broker dealers either consolidate or disappear entirely. While the precise statistics on third-party clearers to other brokers can be vague, it is clear that well-known players have exited the space.

Infrastructure changes

So is all this consolidation a benefit to those who remain? One might assume that a broker-dealer – or even a clearing firm – that now has less competition is reaping the benefit of a smaller and more focused market. The answer, however, is a mixed bag. Without the return of clients and trading volumes, broker-dealers are still forced to chase a limited pool of revenues. Innovative brokers are using this time to address their infrastructure costs. Eliminating fixed costs and streamlining operations will add to a better return. These fixes are temporary, at best, and nevertheless, will make the broker-dealers that remain stronger – an example of 'survival of the fittest' in action.

The infrastructure that supports these brokers is also being forced to adapt. Clearing firms, for instance, are challenging the very paradigms that have existed in the securities industry for decades. The largest remaining clearing firms are forging partnerships with broker-dealer clients that were once competitors or possessed conflicts of interest. The good news here is that a level of confidence exists because stringent regulatory constraints prevent any perception of foul play. Although a clearing firm may draw from the same well as one of his clients, regulations prevent either firm from tainting this well.

A new world order

Self-clearing broker-dealers may now give strong consideration to outsourcing certain back office functions to a third-party clearing firm in order to save costs, make better use of capital, or gain an advantage by using a clearing firm's superior infrastructure in a particular function such as wealth management or international processing. A decade ago, this may have had a commercial impact to that broker-dealer if it had to admit to its client base that client trades were not processed in-house. This is no longer the case. Today clients are seeking value and quality executions. It does not matter if his broker-dealer cannot support the gamut of back office functions, be it clearing or basic books and records. As long as the quality of service is there, there is nothing for the client to worry about.

The new world order that has emerged in securities processing in recent years dictates that broker- dealers and the clearing firms that service them must sharpen specific skills that will set them apart and allow them to survive. Being all things to all people is no longer sustainable. Clients today choose a broker-dealer because of the specialty service provided. The same is now also true when it comes to transaction servicing.

This article originally appeared in BNP Paribas Securities Services' Quintessence Magazine





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The number of broker-dealers in the US has decreased dramatically since the financial crisis of 2008. At that time, there were approximately 5,500 registered broker dealers. Today, less than 4,000 remain.

A consolidated industry

While many consolidated to gain economies of scale during challenging times, others simply shut their doors due to lack of activity and clients rattled by the downturn in the markets. The retail investor has yet to return to the securities markets with the same enthusiasm seen during the late 1990s.

Although market indexes have reached historic highs in recent years, the volumes that drive transaction processing remain sluggish. This has had a ripple effect on the universe of service providers to the broker dealer community, namely the clearing agencies that process trades.

Along with a consolidation of broker-dealers, the industry has witnessed clearing firms that service these broker dealers either consolidate or disappear entirely. While the precise statistics on third-party clearers to other brokers can be vague, it is clear that well-known players have exited the space.

Infrastructure changes

So is all this consolidation a benefit to those who remain? One might assume that a broker-dealer – or even a clearing firm – that now has less competition is reaping the benefit of a smaller and more focused market. The answer, however, is a mixed bag. Without the return of clients and trading volumes, broker-dealers are still forced to chase a limited pool of revenues. Innovative brokers are using this time to address their infrastructure costs. Eliminating fixed costs and streamlining operations will add to a better return. These fixes are temporary, at best, and nevertheless, will make the broker-dealers that remain stronger – an example of 'survival of the fittest' in action.

The infrastructure that supports these brokers is also being forced to adapt. Clearing firms, for instance, are challenging the very paradigms that have existed in the securities industry for decades. The largest remaining clearing firms are forging partnerships with broker-dealer clients that were once competitors or possessed conflicts of interest. The good news here is that a level of confidence exists because stringent regulatory constraints prevent any perception of foul play. Although a clearing firm may draw from the same well as one of his clients, regulations prevent either firm from tainting this well.

A new world order

Self-clearing broker-dealers may now give strong consideration to outsourcing certain back office functions to a third-party clearing firm in order to save costs, make better use of capital, or gain an advantage by using a clearing firm's superior infrastructure in a particular function such as wealth management or international processing. A decade ago, this may have had a commercial impact to that broker-dealer if it had to admit to its client base that client trades were not processed in-house. This is no longer the case. Today clients are seeking value and quality executions. It does not matter if his broker-dealer cannot support the gamut of back office functions, be it clearing or basic books and records. As long as the quality of service is there, there is nothing for the client to worry about.

The new world order that has emerged in securities processing in recent years dictates that broker- dealers and the clearing firms that service them must sharpen specific skills that will set them apart and allow them to survive. Being all things to all people is no longer sustainable. Clients today choose a broker-dealer because of the specialty service provided. The same is now also true when it comes to transaction servicing.

This article originally appeared in BNP Paribas Securities Services' Quintessence Magazine