BrokerDealer Behemoth LPL Financial Undervalued Says HF Activist

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BrokerDealer.com blog update profiling activist fund manager Marcato Capital’s stake in LPL Financial, the financial industry’s behemoth collective of independent brokerdealers is courtesy of InvestmentNews.com.

An activist hedge fund investor on Tuesday afternoon said it had taken a 6.3% stake in LPL Financial Holdings Inc., sending the independent broker-dealer’s stock price higher as the rest of the market declined.

LPL’s shares are undervalued, Marcato Capital Management said in a filing with the Securities and Exchange Commission. Marcato acquired the LPL shares through various funds it controls “in the belief that the shares are undervalued and are an attractive investment.”

Marcato could enter into discussions with LPL’s board to discuss “strategic alternatives” for the company, including a potential for a merger or acquisition, according to the filing.

BrokerDealer.com hosts a global directory and database of brokerdealers in more than 35 countries worldwide.

“These discussions may review options for enhancing shareholder value through strategic alternatives or operational or management initiatives including, but not limited to, improving capital structure and/or capital allocation, M&A, asset allocation, and general corporate strategies,” the company wrote in the filing.

The company’s share price has lagged since it reached a peak of $55.37 in March 2014. Its recent low was $37.72. The stock surged almost 4% after the Marcato filing with the SEC; in early afternoon trading in New York, LPL shares were trading around $41.80. The S&P 500 was down about 1.6% on Tuesday.

ONGOING DIALOG

“LPL Financial maintains an active and ongoing dialogue with its investors and values their input as we work toward the common goal of driving stockholder value,” an LPL spokesman, Brett Weinberg, said in an email.

When asked specifically about a potential merger for LPL, Mr. Weinberg declined to comment.

With close to 14,000 affiliated registered reps and investment advisers, LPL has had growing pains over the past few years. LPL has been in the spotlight recently due to its host of problems with the Financial Industry Regulatory Authority Inc., (FINRA) as well as state regulators. Two products that have caused LPL to pay fines or restitution to clients have been nontraded real estate investment trusts, a popular alternative investment, and variable annuities.

CEO Mark Casady said over the summer that LPL was near the finish line with fines and settlements stemming from securities regulators’ actions.

Alex Kramm, an analyst for UBS who follows LPL, said investment firms such as Marcato focus on why companies are undervalued.

For the entire story from InvestmentNews.com, please click here

How Smaller Sized Broker-Dealers Can Survive

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BrokerDealer.com blog update includes a look at smaller-sized brokerdealers and best strategies that can help them survive in an industry plagued by ‘the race to zero’ insofar as commission rates, ever-increasing compliance costs, and one that requires technology fluency in order to address a combination of needs and demands from institutional clients.

Below view is courtesy of extract from Nick Fera’s contributed column to the TheStreet.com Sept 10 edition..

NEW YORK (TheStreet) — If you’re a small to mid-sized broker-dealer, you know your industry has seen significant consolidation in recent years. Let’s look at how you can survive in this environment.

Since the financial crisis, the U.S. broker-dealer sector has been a hotbed for mergers and acquisitions. A noticeable uptick in consolidation occurred between 2008 and 2010, coinciding (understandably) with the introduction of Dodd-Frank reforms.

The number of broker-dealer firms registered with the Financial Industry Regulatory Authority dropped to 4,040 by April 2015 from 4,578 in 2010, a nearly 12% decrease over five years. Most analysts and industry experts agree that there are two primary factors fueling this trend: shrinking margins and swelling compliance costs.

BrokerDealer.com provides a global directory of broker-dealers in more than 30 countries worldwide.

Small, mid-sized and specialty broker-dealers are at the center of this consolidation. Many of them lack the cash flow and technology to overcome today’s strict regulatory environment. Despite these dreary numbers, hope is not lost. Independent broker-dealers that have yet to merge or become acquisition targets still have options available to capitalize on their evolving industry.

Squeezing the Middle

Similar to the airline industry’s restructuring during the ’80s and ’90s, a handful of large players are eagerly snapping up regional and middle-market broker-dealers. Businesses including Cetera Financial, RCS Capital (RCAP – Get Report) and AIG’s (AIG – Get Report) AIG Advisor Group have grown their portfolios by purchasing firms that likely didn’t have the resources or client base to stay out of the red for years to come.

During and after the recent economic recovery, smaller brokers that did little to differentiate their service offerings (in terms of research, trade execution or asset coverage) or improve their operating cost structures began experiencing a downturn in activity. Business that didn’t shift to the bigger firms went instead to boutique shops that support a niche set of securities or focus heavily on research.

For better or for worse, this recent wave of consolidation has been a necessary chapter for the broker-dealer sector. The large serial acquirers have the budgets, staff and margins to compensate for the gaps that plague small and mid-sized firms. In volatile times (when losing a client or two could bring a broker-dealer down), mergers and acquisitions are enticing alternatives.

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BrokerDealer Chat Service Symphony Sings Dow Jones News

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With merely a few days in advance of its launch, Symphony Communications, the instant-message platform backed by a consortium of Wall Street’s biggest brokerdealers and whose strategy is to undercut the seemingly irreplaceable Bloomberg-powered IM announced that it has inked a deal with Dow Jones & Co to feed streaming News Corp.-owned Dow Jones News and Wall Street Journal content into the Bloomberg-killer service.

BrokerDealer.com is the host to the financial industry’s most comprehensive database of broker-dealers and provides information on brokerdealers across more than 30 countries worldwide.

According to the latest WSJ coverage, Symphony has won backing on Wall Street because it has been viewed as a potential lower cost alternative to a popular messaging service on Bloomberg LP’s terminals. The company has also made its encryption technology a key selling point for financial firms wary about sensitive data falling into the wrong hands.

The Palo Alto, Calif., company has secured $66 million in financing from 14 firms including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co. and BlackRock Inc.

How Feds Find Bad Actor Wall Street Traders-CNTRL-F

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Wall Street broker-dealer traders beware, the FEEBS aka FEDS aka DOJ as well as SEC are building an acronym library to filter and find incriminating dialogue within email and chat messages, according to a recent news piece from Bloomberg LP. For alphabet soup aficionados and algorithm authors, the following suggests that brokerdealers will need to be coming up with a new code language to keep hidden from law enforcement eyes peering into emails and IMs.

BrokerDealer.com is home to the global market’s largest database of brokerdealers operating in more than 30 countries across the free world.

(Bloomberg) — Criminals always slip up. They leave behind fingerprints. Hair. A cigarette butt.

A telltale acronym.

TYOP (tell you on phone), TOL (talk offline) and LDL (let’s discuss live) are red flags for prosecutors combing through the e-mail transcripts of Wall Street traders suspected of illegal activity. No need for a crime lab. A simple search — Control-F on the computer keyboard — has become one of investigators’ favorite weapons to uncover possible lawbreaking, according to defense attorneys and current and former prosecutors who agreed to speak on condition of anonymity.

“Taking a conversation offline provides evidence of intent because if you’re trying to cover your tracks, you probably know what you’re doing is wrong,” said Eugene Ingoglia, a partner at Morvillo LLP and former assistant U.S. attorney for the Southern District of New York.

Phrases such as “call my cell” and “let’s go off e- mail” remain popular among the people who plot insider trades or the rigging of some of the world’s biggest markets. New expressions and acronyms pop up all the time, and authorities say they build lists of favored terms.

Evasion techniques can get creative. Raj Rajaratnam, the fund manager convicted in 2011 of insider trading, would write “fon” instead of “phone.” Prosecutors said they suspected the intentional misspelling was meant to distract the all-seeing electronic Javert of Control-F.

 

Suggestive Phrases Continue reading →

Unbundling and EU BrokerDealer Commissions: A $3bil Hickey

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As brokerdealers in Europe brace for the Jan 2017 implementation of new MiFID II regulations, the topic of unbundling research and how broker-dealers can continue to capitalize on proprietary research made available to institutional clients is leading many to believe that investment banks in the EU could be looking at a per annum $3bil hickey.

As reported by TradersMagazine, with coverage provided by senior staffer John D’Antona, “That’s a lot of scratch in a global equities market that is still struggling to regain its commission-based profitability since 2007.” Below is an excerpt from TM’s most recent reporting..

BrokerDealer.com is the global financial industry’s leading source of broker-dealer information and hosts a database of brokerdealers across more than 30 countries throughout the free world.

According to a new report from equity market consultancy Greenwich Associates, whatever the Euro regulators decide to do regarding their upcoming decisions on the issue of “unbundling” will determine the fate of approximately 1.7 billion euros in European equity brokerage commission payments used by institutional investors. Believing that regulators may restrict or even prohibit the use of commissions to pay for research, investors are preparing to internalize some research functions and expect to increase the amount of “hard currency” payments to sell-side providers.

In its latest report, “Payment for Research; The Calm Before the Storm,” the consultancy reported that if regulators prohibit buyside traders from including as part of their trading commissions paid to a broker an amount targeted to pay for research or “unbundling” could force some brokers or other research providers to stop providing research to institutional investors. In turn, this could open opportunities for conflict-free, independent research providers.

According to Neil Azous of global macro think tank Rareview Macro LLC and the publisher of “Sight Beyond Sight“, a daily global macro-themed analysis and trade idea provider, “European institutional investment managers are presumably looking to alternative sources of high quality research in advance of the new regs, and this could provide a fresh reset to the way in which content is provided and who provides it.

Greenwich Associates reported that institutional investors paid brokers $3.4 billion in commissions on trades of European equities during the 12 months ended Q2 2015. Roughly 52% of that amount-or 1.7 billion euros was directed to pay brokers and third-party research providers as compensation for research.

While 1.7 billion euros is a considerable sum, it is nonetheless far below peak levels and many brokers now do not see cash equity research on its own as a profitable endeavor, Greenwich rote. Also, the consultancy noted that many sellside brokers have already begun to anticipate unbundling and a drop in commission by either downsizing or making research and distribution teams less important than other functions on the desk.

“Should regulatory changes drive down institutions’ overall expenditures for research, even a modest reduction likely will have a substantial impact on the availability of research,” said John Colon, managing director of Greenwich Associates market structure and technology practice, and author of the new report.
Colon added that U.K. respondents were much more likely than their counterparts in continental Europe to expect an increase in hard currency payments. Institutional investors were mixed in their opinions of whether new rules would lead to a decrease in their use of research from global investment banks.
Impact of 2017 Implementation.

Regulators are expected to publish MiFID II-delegated acts relating to payment for research this month. This will give investment managers and brokers greater clarity on the direction of regulation, but will also kick off a scramble to address myriad issues and put in place compliance processes by MiFID II’s January 2017 implementation deadline.

Colon said that current broker vote processes and commission sharing arrangements bring structure to valuing and paying for research and provide investment managers with a high level of access and flexibility, while protecting the interests of their clients.

“Compared to the current broker-vote driven process of allocating payments, administrative burdens on investment managers will be huge,” he added. “We believe that the new rules as currently discussed may cause institutional investors to cut down on the number of research providers they use simple as means of limiting administrative burden and costs.”