Securities Brokerages
Description
Companies in this industry broker deals for buyers and sellers of securities. Major companies include Charles Schwab, E*TRADE, and brokerage units of Citigroup and Wells Fargo (all based in the US), as well as Deutsche Bank (Germany), Macquarie Group (Australia), and Nomura (Japan).
Many large US-based brokers, particularly those affiliated with major banks and financial services companies, operate internationally. Major global financial hubs include Hong Kong, London, New York, Singapore, and San Francisco. London's status as a global financial center has been cast into doubt following the UK's decision in 2016 to leave the European Union.
The securities brokerage industry in the US includes about 23,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $126 billion.
COMPETITIVE LANDSCAPE
Demand is driven by the returns on securities relative to alternative investments. The profitability of individual companies depends on efficient operations and good marketing. Large companies have economies of scale in operations and high name recognition. Small companies can compete effectively by offering better customer service. The US industry is highly concentrated. Four firms (ranked by customers and assets) -- TD Ameritrade (owner of Scottrade), E*Trade, Fidelity Investments, and Charles Schwab -- dominate the business in the US. Discount brokerage firms, which originated in the mid-1970s when stock-trading commissions were deregulated, have become major industry players.
The traditional brokerage industry that sold stocks to individual investors has largely evolved into companies that either broker large stock trades for institutional investors or sell a variety of investment products to individuals. However, reforms enacted in the aftermath of the late-2000s financial crisis have largely put an end to banks and large hedge funds making vast sums buying and selling securities.
Investors' growing appetite for low-cost passive investments has depressed prices on everything from advice and asset management to trading. Pricing pressure is increasing as major brokerage firms reduce commissions -- to zero in the some cases -- on online stock trades in an intensifying competition for customers.
PRODUCTS, OPERATIONS & TECHNOLOGY
Major sources of revenue are brokering and dealing services for investment company securities, which account for about 25%, followed by brokering and dealing services for equities (about 20%). Other sources of revenue include brokering and dealing services for debt instruments (more than 15%) and personal financial planning and investment management services (about 10%).
Brokerage includes helping individuals and institutions buy and sell securities, without taking an ownership position in the securities. Brokers accomplish this by belonging to securities exchanges, such as the New York Stock Exchange (NYSE), the NASDAQ, regional exchanges, commodity exchanges, and various dealer groups. In cases where a broker doesn't have direct access to an exchange, transactions are through a secondary broker.
Typically, a broker who receives an order from a customer will communicate with a company employee located at a particular exchange, who will execute the order at the exchange and report details of the transaction to the broker. Customers typically keep their securities in an account with the broker. Brokers charge customers commissions for conducting transactions and fees for maintaining their accounts.
In addition to the basics, full-service brokers may loan customers part of the purchase price of a security, a process known as margin lending, and may loan securities so that customers can speculate on a fall in prices, so-called short selling. Full-service brokers may also provide securities research, investment advice, and money management services. Some brokers also function as securities dealers (buying and selling securities for their own account), as managers of funds, or as investment bankers. Brokers also act as stock underwriters, selling new shares of stock issued by corporations.
Many large US-based brokers, particularly those affiliated with major banks and financial services companies, operate internationally. Major global financial hubs include Hong Kong, London, New York, Singapore, and San Francisco. London's status as a global financial center has been cast into doubt following the UK's decision in 2016 to leave the European Union.
The securities brokerage industry in the US includes about 23,000 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $126 billion.
COMPETITIVE LANDSCAPE
Demand is driven by the returns on securities relative to alternative investments. The profitability of individual companies depends on efficient operations and good marketing. Large companies have economies of scale in operations and high name recognition. Small companies can compete effectively by offering better customer service. The US industry is highly concentrated. Four firms (ranked by customers and assets) -- TD Ameritrade (owner of Scottrade), E*Trade, Fidelity Investments, and Charles Schwab -- dominate the business in the US. Discount brokerage firms, which originated in the mid-1970s when stock-trading commissions were deregulated, have become major industry players.
The traditional brokerage industry that sold stocks to individual investors has largely evolved into companies that either broker large stock trades for institutional investors or sell a variety of investment products to individuals. However, reforms enacted in the aftermath of the late-2000s financial crisis have largely put an end to banks and large hedge funds making vast sums buying and selling securities.
Investors' growing appetite for low-cost passive investments has depressed prices on everything from advice and asset management to trading. Pricing pressure is increasing as major brokerage firms reduce commissions -- to zero in the some cases -- on online stock trades in an intensifying competition for customers.
PRODUCTS, OPERATIONS & TECHNOLOGY
Major sources of revenue are brokering and dealing services for investment company securities, which account for about 25%, followed by brokering and dealing services for equities (about 20%). Other sources of revenue include brokering and dealing services for debt instruments (more than 15%) and personal financial planning and investment management services (about 10%).
Brokerage includes helping individuals and institutions buy and sell securities, without taking an ownership position in the securities. Brokers accomplish this by belonging to securities exchanges, such as the New York Stock Exchange (NYSE), the NASDAQ, regional exchanges, commodity exchanges, and various dealer groups. In cases where a broker doesn't have direct access to an exchange, transactions are through a secondary broker.
Typically, a broker who receives an order from a customer will communicate with a company employee located at a particular exchange, who will execute the order at the exchange and report details of the transaction to the broker. Customers typically keep their securities in an account with the broker. Brokers charge customers commissions for conducting transactions and fees for maintaining their accounts.
In addition to the basics, full-service brokers may loan customers part of the purchase price of a security, a process known as margin lending, and may loan securities so that customers can speculate on a fall in prices, so-called short selling. Full-service brokers may also provide securities research, investment advice, and money management services. Some brokers also function as securities dealers (buying and selling securities for their own account), as managers of funds, or as investment bankers. Brokers also act as stock underwriters, selling new shares of stock issued by corporations.
Table of Contents
- Industry Overview
- Quarterly Industry Update
- Business Challenges
- Business Trends
- Industry Opportunities
- Call Preparation Questions
- Financial Information
- Industry Forecast
- Web Links and Acronyms
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