The collapse of two US equity trading firms this month suggests difficult market conditions are likely to keep claiming small shops, jeopardising the jobs of scores of stock analysts, traders and the salespeople who hawk stock research.
Ticonderoga Securities, which last year purchased stock research firm Soleil Securities Corp, is closing its doors on Friday, confirmed Richard Sgueglia, head of global equity sales and trading at Ticonderoga. The company has 74 employees, including 14 analysts, according to its website. That's down from 21 analysts when the purchase was announced in May.
WJB Capital Group, started by New York Stock Exchange floor brokers in 1993, shut its doors early this month after recently beefing up its analyst force.
Both companies are agency brokers, meaning they execute stock trades for hedge funds, mutual funds and other institutional investors but do not put up their own money to complete the trades.
It's always been a business with razor-thin profits, but the model has been pummeled in the last two years by falling trading volume, rising competition from all-electronic trading venues and direct access to brokers on exchange floors and continually falling commissions.
To differentiate themselves to their hedge fund and mutual fund clients, agency equities firms have been adding ancillary services such as research, advice on the most efficient trade execution, fixed-income trading and even investment banking services such as privately raising money for public companies.
"Very few businesses make it on execution-only anymore," said Robert Stellato, head of equity capital markets at Pritchard Capital Partners, which offers banking and trading services to energy companies and recently lowered its commission rates to attract volume. "Every small firm is struggling."
The problem is that new services add marketing, technology and compliance costs that can stretch revenue-starved companies when volume falls. Even in good times, companies skilled primarily in trade execution often lack the expertise to sell research to portfolio managers and hedge fund analysts. Experts say it is likely more closures will occur in the weeks ahead.
Ticonderoga bought Soleil last May, two months after hiring a team of bank loan and credit derivative traders from Cantor Fitzgerald and Goldman Sachs to expand into fixed-income markets. It closed the fixed-income effort within six months.
WJB, which burgeoned from 10 employees to about 100 in the past 10 years, boasted in a December press release that it had added four analysts covering healthcare, biotech, lodging and semiconductor companies at the expense of rivals.
"As the number of buy- and sell-side research analysts continue to shrink in the face of difficult conditions, we believe firms that offer a high-quality, idea-focused research product will be rewarded in the marketplace," WJB Chief Executive Craig Rothfeld said in the release, just weeks before its closure.
Surviving the Drought
There are scores of financial services firms modifying their business models or struggling to survive the stock trading drought, analysts said. Susquehanna Financial Group, a unit of options market-maker Susquehanna International Group, laid off about 15% of its equities agency personnel this month, the company confirmed. Gleacher & Co, an investment banking boutique, shuttered its equities business in August.
"Until we see commission volumes turn around, the pressure on smaller agency brokers that have been adding services is going to be fierce," said Michael Mayhew, chairman of Integrity Research Associates, a consultant on trading costs.
Stock trading volumes in the United States fell 13% in 2010 and another 8% in 2011 as many hedge funds closed their doors and the volatility that stimulates trading weakened. "In order to make money in this environment you got to keep your costs in line, and that's hard when you have upfront costs to land big accounts" Stellato said.
Commissions have fallen from an average of more than 5 cents a share about five years ago to under 2 cents for pure execution, several traders said. As long ago as 2006, Morgan Stanley's <MS.N> then head of trading complained that commission prices were falling 18% annually in the United States.
Large companies such as Morgan Stanley have the advantage of offering multiple products and services -- from access to initial public offerings to large stock loan operations -- that hedge funds and mutual funds depend on. But the lack of high volume to compensate for low commissions is affecting all firms.
"Anyone whose business is volume-dependent has been challenged," said Chris Allen, a brokerage industry analyst at Evercore Partners who once worked at Ticonderoga.
The venture capital firms behind some of the firms also are taking hits.
Bain Capital and Bessemer Venture Partners, the main backers of Soleil, poured more than $30 million into the firm and sold it to Ticonderoga for under $2 million in cash and assumption of some other obligations, according to a source familiar with the business. Soleil, founded in 2003, was affiliated with 21 analysts covering 17 industry sectors, down from 51 independent analysts covering 350 public companies at its peak. The analysts shared in commissions their trading ideas generated.
"We've hit a perfect storm of technology competition, overregulation and hard economic times," said Ticonderoga's Sgueglia. "I've seen one leg of the stool get out of whack but never so many in one contracted period. To be a smaller institution these days is almost impossible."
