Brokers bite the hand that fed them
Specialists steal clients from big securities firms
by Jon Birger
Crains New York
9/13/99
These are not the best of times for independent floor brokers on the New York Stock Exchange-the swarm that does much of the actual buying and selling on the exchange floor.
A highly publicized trading scandal has sullied their reputations, and changing technology threatens their very existence.
But now, the more enterprising independent floor brokers have begun to fight back. They are going into direct competition with the big brokerage firms, like Goldman Sachs & Co. and Merrill Lynch & Co., that until now have provided their livelihoods.
"The reason we made the move is because we think it will turn out to be a more profitable business," says Joseph Cangemi, a principal with Francis P. Maglio & Co.
Historically, floor brokers' only role has been to execute trades on behalf of big firms that get their orders from the investing public. Now, many of the brokers are marketing their services directly to institutional investors, charging commissions that are 40% less than what investors pay when they place their trades through a Goldman or a Merrill. Even so, these commissions are higher than what big brokerages pay the floor brokers.
Maglio is one of at least five independent floor brokerages-along with Lawrence Helfant Inc., Richard A. Rosenblatt & Co., Robbins & Henderson and Stewart Frankel & Co.-that have developed substantial businesses in executing trades on behalf of investors. Even the floor brokerage arm of Wall Street giant Bear Stearns & Co. has gotten into the act, offering direct access to clients of Bear's clearing operation.
Doing it quietly
A few dozen other independent brokers are also getting into direct access because they feel they can no longer depend on the Merrills and Goldmans for business. Merrill, which historically has sent more orders to the Big Board than any other firm, last week took a 14.3% stake in Archipelago Holdings, an electronic trading system that plans to trade NYSE-listed stocks.
Few floor brokers who intend to continue handling trades for big firms while also seeking business directly are willing to discuss plans. They say the big firms have threatened to pull their business from floor brokers that are competing with them for institutional accounts.
"It could be economically injurious if our name appeared in print," says the head of one independent floor brokerage.
Floor brokers who are willing to talk say the growth in direct access has more to do with demand from money managers than with their own efforts.
"The independent brokers are not in a position to do extensive marketing," says Richard Rosenblatt, one of the first floor brokers to offer direct access. "They have to spend the entirety of their day on the New York Stock Exchange earning a living."
Just like the individual investors now flocking to discount brokers, money managers are increasingly impatient with paying commissions far higher than the actual cost of executing a trade. The commissions charged by the big firms cover not only the cost of trading but also equity research. The floor brokers aren't supporting expensive research operations, which has allowed them to undercut the commissions charged by the so-called upstairs brokers.
Short-term gains?
Doing so has allowed the floor brokers to challenge a widely held assumption that automated systems like Archipelago will render them extinct. By offering direct access, the floor brokers are making the case that it's the upstairs brokers, not themselves, that are expendable.
"They're saying, 'We're the ones who have been providing executions for years and years, albeit under other people's names,' " says Jack Morton, an industry consultant who formerly headed the NYSE's market performance committee. "Now they're telling investors, 'If you want to cut out the other layers and come directly to us, you have a better chance of getting the best price and of maintaining the privacy of your order.' "
So far, direct access is being offered only to institutional investors, but some wealthy individual investors will soon get their own chance to send orders directly to the floor of the NYSE.
Last month, the parent company of TFCN.com-an upstart on-line broker catering to wealthy individuals-announced plans to acquire Hochstin & Co., an independent floor broker. The deal will allow Hochstin to offer direct access to TFCN's customers.
In the end, direct access could turn out to be a short-term fix for independent brokers. Orders from direct access could wind up being just as vulnerable to automation as the traditional orders they receive from the upstairs brokers.
"The automation we've seen to date is nothing compared to what will happen when electronic trading systems start trading NYSE stocks," says David Whitcomb, a professor emeritus of finance at Rutgers University.
Low-cost private trading systems such as Archipelago have applied to the U.S. Securities and Exchange Commission to be registered as exchanges, a status that would make it easier for them to trade NYSE stocks. If these systems siphon too many orders away from the Big Board, it could force the exchange to scale back its floor operation and reinvent itself as an electronic stock market.
"The technology is not yet there to put the floor brokers out of business," says James Angel, a professor of finance at Georgetown University. "But the handwriting is on the wall." |
