Not to mention the other requirement of MIFID II: strict requirements for soft-dollar commissions for research. When I started working on the trading floor, soft-dollar commissions were the way business was done. A quant (me) would generate trading ideas that would be subsequently distributed to the desk’s institutional clients. An example of a trading idea could be the economic rationale for why the futures prices on Canadian dollar were about to rise, and, hence why someone like a treasurer of a business with Canadian exposure would choose to buy the futures now, rather than wait for the quarter end. Clients choosing to trade on the research were invariably charged a spread with the cost of the research idea priced-in, and that was just business as usual.

In addition to the secret sauce that will be spilled by transparency requirements and the tight control of soft-dollar commissions, the last component of traditional brokerage businesses was quality relationship management. Can one differentiate a business by a friendly attitude and a free pint of beer? Of course, yes. However, a client can only drink so much beer on a given day, and the prospect of hanging out with yet another broker can be daunting, to say the least.

So where is the brokerage industry going under the new regulations? Technology is certainly not only enabling the requirements of transparency, it is also leveling the field as far as investors are concerned, making broker-shopping easy. How are brokers to retain their clients?

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The answer once again lies with technology. Smart order routing solutions should enable brokers to compete for clients beyond beer outings and popular tickets. A solid example of someone who has been doing this well for the past decade in the U.S. equities is Pragma Securities: leveraging PhD-level research and the technology to deliver benchmark-beating routing to their clients. However, even Pragma cannot fully disclose its secret sauce – doing so would make it vulnerable to competition and likely affect its business considerably.

Irene Aldridge

Irene Aldridge is Managing Director, Head of Research and Development, AbleMarkets.com
and Able Alpha Trading, LTD. She is the author of High-Frequency Trading: A Practical Guide
to Algorithmic Strategies and Trading Systems. She can be seen at the Big Data Finance
conference at New York University on May 19 and 20, 2016. Irene can also be reached at Irene@AbleMarkets.com.

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Under the rule, a brokerage will have to include a “readily apparent reference and hyperlink” to BrokerCheck on a homepage that is initially viewed by retail investors. It also would have to include links to the database on profile pages of individual brokers.

The rule will go into effect no later than 180 days after the SEC approval order is published in the Federal Register. It’s not clear when the order will appear there.

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To read the entire story, published by InvestmentNews.com , please click here

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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.

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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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