Though the closure rate of FINRA-registered broker/dealers is slowing down, the number of firms is expected to decline from 4,154 at the end of last year to 3,800 by the end of 2016, said David Alsup, founder of Fishbowl Strategies. Regulatory and compliance burdens will force smaller shops out of business or into the hands of larger players, while high barriers to entry make it difficult for new firms to open up, Alsup said.
Firms at real risk are those with less than 10 registered reps; Alsup estimates there are as many as 1,000 b/ds of that size.
“The regulation is pushing the smaller broker/dealer out,” Alsup said. “You have a five-person shop, you now need a full-time compliance manager. You need a full-time financial operations principal. A full-time compliance manager is not going to walk in the door for less than $60,000 a year.”
FINRA has also raised trading activity fees, as well as the costs of filing for a new broker/dealer, Alsup added, further burdening small or new brokerages.
FINRA’s Comprehensive Automated Risk Data System (CARDS) initiative could also increase costs which would disproportionately hit smaller B/Ds. The rule would require clearing firms and, eventually, brokerages to submit data on securities transactions, holdings and account profiles.
“If CARDS comes, there will be broker/dealers that just cannot make it,” Alsup said.
While the industry is still losing more firms than it’s gaining, the number of withdrawals has been slowing over the last couple years. In 2014, there were 214 broker/dealer withdrawals from FINRA, 54 of which occurred in the fourth quarter.
In 2013, there were 254 withdrawals, compared with 311 withdrawals in 2012 and 327 in 2011.
And the number of new firms is on the rise. In 2014, 148 new firms opened up shop, compared to 106 in 2013, 129 in 2012, and 163 in 2011.
Two years ago, the industry was losing b/ds at a rate of about 20 to 22 per month; now the industry’s losing about 12 firms a month.
Of the 214 firms that closed up in 2014, 104 were equities firms. Such traditional equities firms are consolidating, while newer b/ds that develop a niche in the marketplace can survive, Alsup said. For example, firms that focus on alternatives, exchange traded funds or insurance are seeing growth.
“Newer b/ds ... have niches in the marketplace,” he said.
