Brokerage Industry Death Spiral Continues

It’s been over for the small broker-dealer model for awhile, but a hundred-year-old industry doesn’t merely go away quietly and all at once.  There were companies manufacturing typewriters and word processors into the late 90’s and I’m sure the toga weavers were hard at work for decades after the fall of the Roman Empire.

And so it goes here in the early dawn of 2012 as two of the most well-regarded boutique broker-dealers have been extinguished against the backdrop of a raging bull market for everyone else…

From CNNMoney:

The 2012 surge in the stock market hasn’t been positive for everyone on Wall Street: Hundreds of small brokerage firms on death watch.

Trading volumes and commissions are at their lowest levels since 2007. And so far this year, three small but well-known brokerage firms have already had to call it quits.

The swift unwinding of WJB Capital Group, Ticonderoga Securities and Kaufman Brothers has left investors to wonder who’s next. Representatives from WJB, Ticonderoga, and Kaufman did not return calls for comment.

The problem here is a very simple one – the research is not driving trading commissions large enough or frequently enough to hold up the cost of running a firm.

Trading is now done at fractions of a penny, often with little or no research exchange between institutional brokers and their clients.  Buyside shops have brought research in-house at very little cost (unemployed analysts are practically swinging from the rafters here in NYC).  In addition, single stock selection has been de-emphasized a great deal as fund flows have turned from the open end actively managed fund complex to the passively managed ETF snackbar.  When the average holding time for a security is measured in water drips from a faucet, why should anyone bother to care about how this quarter’s free cash flow stacks up against next quarter’s estimate?

And if the research isn’t generating trades, and the trades that are getting done are subject to commission deflation (2 cents a share!) and on top of all that the firms can’t supplement by making markets at a decent margin thanks to decimilization – well, what exactly is it…ya do here?

There are 4066 smaller brokerage firms left.  I’m rooting for you guys, but it won’t be easy.

Which Brokerage Will Be The Next To Fall?  (CNNMoney)