As Small Broker Business Model Fails, Wall Street Access Bucks the Trend

Smaller brokerages have been closing shop over the last few weeks as a growing number of these firms surrender to a decline in commissions and weak trading volumes for the third year in a row.

ThinkEquity LLC, the San Francisco-based investment bank, said last Thursday its stock-trading business will close, while Oscar Gruss & Son Inc. halted merger-arbitrage operations on Oct. 12. Rodman & Renshaw LLC, which acquired brokerage Hudson Holding Corp. last year, told regulators in a September filing that it didn't have enough capital and would stop trading, reports Bloomberg News.

Other smaller brokerage firms that have fired traders or thrown in the towel this year include WJB Capital Corp., Ticonderoga Securities and Kaufman Brothers. In early September, Nomura Holdings shuttered its U.S. cash equity trading operations, letting go traders after it consolidated the equity trading business with Instinet, its electronic agency brokerage unit.

Several firms have thrown in the towel because the fees they generate from computerized trading are lower than what they earn from the high-touch business. According to data from Tabb Group - cited by Bloomberg - brokers who trade manually charge about twice as much as those who use algorithms, or software systems that break block trades into smaller pieces.

Money managers pay about 7.3 cents to trade $100 of stock, down from 10.6 cents three years ago, said the article, which cited ITG data.

However, not everyone is firing stock traders. Some brokerage firms are seizing an opportunity to hire the traders from these firms and expand their own operations.

Yesterday, Wall Street Access said it was bringing on a trading team of 12 seasoned veterans from Rodman & Renshaw LLC, which exited the brokerage business last month.

"We went into 2012 thinking it would be the year of capitulation and consolidation in the broker-dealer community. We have seen a fair amount of that," Sean Kelleher, president of institutional sales and trading at Wall Street Access, said in an interview. "The industry is seeing the small firms that are not well capitalized shut their doors."

What's hurting smaller brokers is that a lot of buy side firms are shrinking their broker lists and the customers are doing business with the better-capitalized firms, he added.

Secondly, smaller sell-side firms don't have enough resources to sustain them through a difficult time, he added. Despite the view that more institutions are using computerized trading and algorithms to save on fees, Kelleher noted that the teams of seasoned traders he's brought on have "very deep high touch relationships."

Wall Street Access, a broker-dealer with offices in New York and Tinton Falls, N.J., has been in business since 1981 and has "a very good infrastructure and platform in place," said Kelleher. Among the factors that enabled his firm to bring on the trading team, Kelleher added, is that the company is well capitalized, and that it has a tier one clearing relationship with Pershing Bank of New York - which has been in force for 12 years.

"I think we were a good fit for them because we allowed the whole group to come in," said Kelleher. The team will be trading equities securities, both listed and OTC, domestic and foreign, as well as listed equity options and index options. It will also trade foreign American Depository Receipts (ADRs) and ordinaries, along with all fixed income asset classes.

Also, the new team for the first time brings a market-making piece of the business to Wall Street Access. The addition of market making to its business is key since it allows the firm to now serve the broker-dealer community, added Patrick Clark, vice president of the market making group desk at Wall Street Access.

Whereas the institutional clients can be served on an agency basis, a lot of the larger private client services desks look for that market making presence, said Clark. "It will create more merchandise and give us more to talk about and get into he tape more often," he said.

The company's market making will focus on Nasdaq and NYSE-listed stocks and also in secondary and tertiary names that are traded on the Bulletin Board and pink sheets - which include Chapter 11 bankruptcy reorganizations and preferred stocks.

"It's not just a typical half-a-penny to 10 cents a stock. There are a lot of bona fide stocks that do trade in the pink," said Clark. Looking ahead, Kelleher said that Wall Street Access would be open to expanding further. "We're very interested in adding production people who can help us expand the breath of our offering," he said, adding that he would consider individuals or teams.

Unfortunately, the months ahead may bring more consolidation to stock trading firms. "It is a trend that the undercapitalized broker-dealers are going to have a hard time getting through this difficult period," said Kelleher.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio