09.30.2011
By Terry Flanagan

Independent B-Ds Under Pressure

Continuing instability in the markets and increasing regulatory compliance needs have placed smaller broker-dealers, already operating under tight margins, in a difficult position.

The volatility and market tumult seen in recent weeks has placed independent broker-dealers, which are operating in an increasingly difficult and competitive market, under increasing pressure as certain investors shy away.

“Smaller broker-dealers have been disappearing at a rate of 5 to 10 percent every year,” said David Sobel, executive vice president, general counsel and chief compliance officer at Abel/Noser, a New York independent broker-dealer.” The trading volume on that level, mostly from ‘mom and pop,’ is drying up, so they’re losing commission.”

According to Finra, the amount of total registered broker-dealers has dropped about 10 percent in the past five years, from 5,029 in 2006 to 4,522 as of mid-2011.

The reduced trading activity isn’t limited to just the retail segment, as the institutional side has also felt the crunch.

“A lot of (institutional investors) are sitting on the side, they think that they can’t risk all this pension money that they have,” said Sobel at Abel/Noser, whose clients are strictly institutional. “They’re not trading as much as they used to. Our trading here is probably down 30 to 40 percent over the last 2 years because of that. They’re just not in the marketplace like they used to be.”

In addition to declining trading volume from the core constituency of smaller broker-dealers, there is also the burden of increasing regulatory compliance.

“Regulation has become so burdensome, (independent broker-dealers) can’t afford to keep up with it,” said Sobel. “Most of what they’re trying to regulate now could have been done with existing rules, if they tried to enforce it. Is it going to save the markets to have the 4 people in my back office have to be registered as Series 99, I don’t think so.”

Series 99 is a license that on Oct. 17, will need to be acquired by back office individuals at broker-dealers for identification purposes. In the past, the license was only required for those working in sales and trading, or the front office, of brokerages.

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