Volatility Boosts Broker-Dealers

Terry Flanagan

With trading volume off last year’s levels through most of 2011, broker dealers have faced a tough road. But the recent spike in market volatility resulting from the ongoing debt problems, the S&P downgrade of U.S. credit, and a weak global economy may be the boost that they were waiting for.

“There have been a lot of cross currents adding to volatility,” said Bernie McDevitt, vice president of institutional trading for Cheevers & Co., a Chicago-based broker dealer. “Between the fight over the debt ceiling coming down to the absolute last minute, the fear of the debt contagion in Europe spreading, and the softness in recent economic numbers, things have come to a bit of a head.”

Regarding the recent plunge in the markets, amid investor fears of a double-dip recession, McDevitt simply sees it as a “function of a lot of investors leaving the risk trade all at once. But it’s kind of like a crowded theater — it’s hard to get out all at once.”

Although there’s been a lot of trading activity and turnover in the market as a whole, in McDevitt’s area of operation, which mainly covers pension funds, he’s not seeing any panic. His clients typically have a longer-term focus, and usually hold long-only investments. “Other than maybe taking advantage of an opportunity, I haven’t noticed a lot different,” said McDevitt.

“The volatility will last a month or two, and give an opportunity for energized business levels relative to rest of 2011,” said McDevitt. “After that, it may regress.”

While the market volatility can provide a short term gain for broker dealers, increasing regulatory scrutiny is looming just over the horizon.

“The regulatory environment is challenging, it makes conducting business very difficult,” said McDevitt. “It’s ironic that the most transparent asset class, equity, should be drawing this kind of scrutiny, when it’s OTC products that’s been really the cause of most problems in the last five years.”


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