Mid-sized brokers are struggling to make money as equity markets recover and reach a new normal, a report from consultancy GreySpark Partners has said.
It claims the growth of trading volume and more optimistic revenue projections, coupled with decreasing but better quality liquidity have created a new set of market conditions that will favour some broker business models over others.
“Equity markets are at a turning point as large sell-side flow houses and prime brokers prosper again while boutique offerings grow their aggregate market share. The remaining players, primarily mid-size firms, must adapt to this altered landscaped,” GreySpark said.
The report suggests that mid-sized firms have struggled since the financial crisis to maintain market share at a time when cost-per-trade was also rising, putting pressure on revenues and profitability.
In order for these brokerages to survive, GreySpark said they will need to adopt a new strategy, focusing on one of specialisation, reduced ambition, monetisation of their franchise and financing volume.
Brokers also need to adapt to a changing technology market that has largely moved away from reducing latency. Instead, merging high- and low-touch platforms effectively as low-touch’s constant availability sees increasing demand.
GreySpark believes that, in the next two years, banks will have to abandon having separate high- and low-touch trading platforms and will instead have to invest in consolidated offerings from third parties.
Similarly, brokers will no longer be able to run much of their software in house, as third-parties have successfully commoditised financial services technology, meaning only those functions that offer a true competitive advantage can continue to be run internally.