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Small Brokerages Lose out as Big Banks Take In Trading Revenue

May 9, 2018

Large banks such as JPMorgan Chase and Bank of America had a spike in trading revenue in the first quarter — at the expense, it seems, of smaller brokerages, according to the Wall Street Journal.

The trading divisions of JPMorgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley had percentage gains in equities sales and trading revenue from 26% to 38% in the first quarter compared to the year prior, the Journal writes. But trading revenue at smaller firms such as Stifel Financial, Raymond James Financial, Evercore and Piper Jaffray dipped 10% or more in the first quarter compared to a year ago, according to the paper.

The results are due to the rising popularity of passive index investments, portfolios composed of ETFs and investment volatility, all of which have hurt active fund managers that are traditionally the core clientele of the smaller brokerages, the Journal writes.

“In the first quarter, the volume that was occurring was from passive strategies, and those … tend to be more low-touch trading that the big banks have always dominated,” Stifel’s chief executive Ronald Kruszewski tells the paper.

European regulations also contributed to the trading revenue disparity between large and small firms, according to the Journal. The rules known as Mifid II that went into effect in Europe this year ban the use of commissions for paying for equity research, and any fund that invests European clients’ money, regardless of where they trade, may now be forced to pay for research directly, the paper writes.

“The model for research is challenged across the industry right now, and has been for about a decade,” Paul Reilly, chief executive of Raymond James, said last month on a call with analysts cited by the Journal. Nonetheless, the company doesn’t plan to get out of trading, Reilly said, according to the paper.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here.