Tough Times Ahead for the Broker-Dealer

A few months ago, technology vendor Fidessa released a whitepaper that dealt with the future evolution of the brokerage model. In terms of technology, they said in an accompanying piece, a dynamic approach was required, as with business as a whole. Brokers would have to become smarter in order to survive.

Having spoken with several this week, though, it's not clear exactly how some will survive. Voice-based brokers, some of whom deal with significant buy-side clients, are struggling with the recovery from the financial crisis as much as they are with the changing paradigm that technology introduces into the market. One practitioner I spoke to this week, who deals primarily with corporate bonds, collateralized debt obligations and the like said that they were doing roaring business during the crisis, as banks weren't allowed to step in front of clients and take positions in those markets. That has changed now.

Likewise, the electronic execution angle hasn't helped in some ways. Another broker said that all they had been able to do on that day were a couple of trades through MarketAxess, which had netted a pittance in commission. There's hard work involved, but the fruits of it are nowhere near as ripe as they used to be.

Connections
It's not just in fee structures and take-home pay that brokers are feeling the pinch, of course. Given the imminent birth of the Swap Execution Facility (SEF) regime, many brokers are going to be forced to connect to these entities just to retain buy-side business. The hedge fund which uses multiple brokers, has a fair degree of its operation outsourced and is purely focused on strategy, after all, is not going to want to have a play around with APIs and gateway protocols─they'll expect that to be provided by their broker.

The consensus, from speaking to several people about this, seems to be that we'll ultimately end up with around three to four SEFs per major asset class, such as rates. More specialized products and asset-specific SEFs, such as players like FXall, will exist, but the final number will not be anywhere near the 50-odd entities waiting to register.

In a time when even the mightiest banks are feeling the strain of budgets and policy, spare a thought perhaps for the men and women who have to live through the same thing without the same depth of pocket.

Still, the burdens will be severe. In a time when even the mightiest banks are feeling the strain of budgets and policy, spare a thought perhaps for the men and women who have to live through the same thing without the same depth of pocket.

SST Awards
As a final note, the Sell-Side Technology Awards are still open for nominations. The event will be held on April 23 in Manhattan, so get your entries in sooner rather than later.