I've got a mentor that runs a hedge fund out of Los Angeles. He's recently told me that the brokerage business is in for a big hit; even asked me if I had a plan B if things don't work out at my firm. He tells me that there is less of a need for execution only brokerages and that machines will shrink our business.
I work for a fairly sized broker dealer. I'm on the institutional side and we mainly focus on US equities. In the last few months, I have noticed upper management pushing for layoffs in sales and trading in all departments from east to west, which does support what my mentor says about our business.
How valid is his statement? I personally feel that the institutional stock brokering business still needs the human element that machines can't replace and block trading is still a value added service we provide. What is the chatter on the street about this issue?
I don't think that's necessarily wrong. Most funds use brokerages to trade because they value the research, but not because of the execution. Funds who don't value sell-side research oftentimes use tradebook to trade instead. For trades of a certain size, you need a brokerage, but for trades in the $1mm to $5mm for a stock with decent liquidity, the brokerages are not necessary anymore.
yea this business will consolidate with more machines stepping in, but there are a lot of other reasons to shop around brokerages.. Sometimes they hook you up with some new investment strategies / ideas etc...
Brokerages work for you for many other reasons on top of execution.
Is sell-side research, then, going to go to the way of the dinosaur?
It is interesting that Bloomberg is now getting into the brokerage business, with their Bloomberg Tradebook. They are also hiring analysts to cover the various sectors. I personally met one of their new analysts covering biotech a few months ago and know people that work at Tradebook.
I think their business model is that, if you use their brokerage service then they deduct the terminal leasing fees from the trade commissions, or maybe the other round.
interesting brandon. Care to tell more about the spread there. With bterminal and decent leverage.. it should be a winner. Assuming they have good commissions. Do they trade options, or mostly equity.. Other non us markets, europe, asia, etc..Let's hear it.
had many opportunities to do IDB, but didnt because its def shrinking..say 4 more years tops
Since the dawn of the industrial revolution, machines and computers have been replacing human beings. So, the questions that needs to be asked is: What do you need a human being to do? What tasks do you need a human's intuition or decision making ability or capacity to empathize to successfully accomplish?
In terms of striaght-up execution, I think computers can do a lot to replace humans. However, it's those soft skills like doing research, giving advice, putting together complex trades in order to satisfy the needs of a particular client, etc. that are not going to go away....
I'd like to defer you to last week's article I wrote concerning this but in a slightly different manner, High Frequency Trading Is Not Breaking The Markets. Also, I suggest you look at my sources because one of them has a new book released, Broken Markets by Sal Arnuk & Joesph Saluzzi of Themis Capital. If you purchase this and read it, I suspect it will give a greater depth of answers to your questions. Lastly, read the comments section also as there is a lively discussion between myself and Just about the human element of markets. Enjoy!
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