Published on March 24, 2016 by Guest Blogger
Revenue and cost pressures have been strangling traditional brokerage houses since the last decade. Institutional trading commission rates in the US have declined more than 50% since the 2000s and we note a similar trend in Europe and Asia as well. Top-line pressure has been further accentuated by the emergence of low-cost, execution-only brokerages.
Electronic trading has taken fore, impacting the business of the traditional brokerages. Some surveys suggest that, in the US, about 60% of all the trades are being conducted electronically. Further, the increasing cost of regulations, such as MiFID II, which propagates the separation of commission payments for research and trade execution, and high-cost resources are denting margins.
Research typically constitutes 20-25% of overall costs for a brokerage. Brokerages have been focusing on potential cost saving measures to remain profitable. Accordingly, many brokerages have been looking at reducing research budgets to give a fillip to their cost control initiatives.
Given the challenging environment, we believe research departments will look at the following possible approaches:
Brokerages may want to focus their efforts only on sectors where they have a niche or have star analysts and deprioritize other sectors. This could potentially mean dropping coverage of their non-core sectors.
Brokerages may prefer to have different tiers of research products depending on their area of expertise. They may continue to provide the highest level of research and services for their core sectors whereas they may scale down research on other sectors. They may also look at potentially automating parts of their research process. Some of the possibilities could include using a combination of XBRL filings, web scraping and a centralized data store to cut down time taken to build financial models from scratch by 50%. Similarly, they may look at automating publication of periodicals such as dailies, weeklies and quarterlies by research teams by linking them to a centralized financial models database resulting in about 75% time savings.
Brokerages may enter into strategic partnerships with local brokerages to monetize markets. These partnerships could be in the form of co-coverage of stocks or utilizing research from local brokers to share with global clients that have an interest in local markets. This approach obviously limits brokerages’ ability to control the quality of the research product.
Brokerages may adopt any of the above approaches or a combination of the above approaches, depending on their unique situation in the markets they serve, their competitive positioning, market share, etc.
The time to introspect and change is now!
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