Coming Soon To Institutional Sales/Trading: Discount Brokerage

Institutional Trading

Let the Pinching Begin

You knew it was coming sooner or later.  I guess it’s coming sooner.

Goldman Sachs (GS) and other big securities dealers made bundles of money last quarter because they faced fewer competitors, but now BlackRock(BLK) is hoping to change that. 

BlackRock, soon to be the world’s largest money manager, is working on a way to cut out the middleman on a lot of its equity trades, according to a report in the Financial Times on Saturday. Currently, it executes trades through banks like Goldman, Morgan Stanley (MS), JPMorgan Chase(JPM) or Citigroup (C). 

One of the ironies and unintended consequences of the credit crisis is that, while fewer large brokerages remain, those that stuck around are raking in easy money from the large institutions that now have limited choice when executing trades.  Unfortunately, this scarcity of choice comes with a counter-balanced problem for the brokerages…big shops like BlackRock know how easy-come this trading fee money is for Goldman et al and they certainly didn’t become the biggest money manager on earth by ignoring cost structure.

My friends on institutional trading desks on The Street would argue that they already offer volume discounts for trade executions, with the average mutual fund or hedge fund paying only pennies a share.  They would also make the case that the funds are gaining access to research and strategy calls in exchange for their order flow. 

Both of these statements are true, but losing relevance everyday. 

 Just as the arguments for higher cost structures in other industries have  been washed away by the internet tsunami (go ask retailers or content providers), so too will the arguments for premium pricing for institutional trades succumb to the inevitable erosion. 

Ten years ago or so, the discount broker revolution came to town in the form of online trading and its sights were aimed squarely at the retail brokerage firms.  Guys running trades for clients on a full service basis had to actually provide, umm…full service!  Many firms adapted by eschewing commission-based business (as trade execution became commoditized) and migrating toward the fee-based advice model that has taken over the wealth management industry.

Looks like the revolution may now lay siege to the highly-profitable institutional side, and as with retail, things will never be the same. 

BlackRock is an industry leader, and if they follow through on CEO Larry Fink‘s discontent with Wall Street’s easy money execution business, look out below for profit margins. 

Bulge Brackets…meet Creative Destruction.  You kids play nice!


Goldman’s Giant New Rival (

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