A challenging market is spotlighting the broker-dealer sector, and only those with the strongest offerings can be confident in their future.

Large broker-dealers with a strong research product should be safe, as are the smaller boutique shops that specialize in best execution. That leaves mid-sized players, which may have good research and good execution but not the best of either, as vulnerable.

“The big are getting bigger and the middle is getting squeezed,” said Ian Huggard, head of trading at Dublin-based stockbroker Bloxham, at WBR’s TradeTech Europe 2012 in London. “Being caught in the middle means a big cost overhead, and you may be without a full suite of products.”

Broadly speaking, broker-dealers can add value in two areas: research and relationships/capital introduction, and cost. The Goldman Sachs of the world do well at the former, while small players down to the garage level can compete on price. “In the middle you don’t have the best research or the best fees,” said Alex Fleiss, chief investment officer at technology and asset management firm Rebellion Research Partners, also at TradeTech.

A boutique broker may offer a distinctive algorithm, or perhaps a big name on the research side, to stand out. Without such differentiation, a mid-sized broker would be left to compete with much larger, deeper-pocketed firms at their own game. “Your research is not going to be as desired as Goldman Sachs, and your trading technology is not as cutting-edge as the trading specialists,” Fleiss said.