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Brokerage Firms Closing Amid Trading Slump, Capital Squeeze

Feb. 3 (Bloomberg) -- Stand-alone U.S. brokerages hurt by 2011’s trading slump may struggle to raise capital or obtain adequate loans unless markets improve, adding to closures that imperiled more than 200 Wall Street jobs last month.

WJB Capital Group Inc. and Ticonderoga Securities LLC told employees in January that they would shut amid a shortage of capital, people familiar with their plans said at the time. Kaufman Bros. LP, the minority-owned investment bank that helped unwind U.S. stakes in bailed-out financial companies, ceased business Jan. 30. The New York-based firms each employed about 100 people or fewer.

Some firms’ capital weakened as equity trading stalled last year amid a downgrade of U.S. debt and concern Europe’s debt crisis could deepen. Investors are weary of the long-term security of some smaller, single-business firms, said Paul Reilly, chief executive officer of Raymond James Financial Inc.

“A lot of firms aren’t big enough to have sustained earnings where they can go to the debt markets,” Reilly said Feb. 1 in an interview at Bloomberg’s headquarters in New York. “You’re investment grade or you’re not. That means you have access or you don’t.”

Average daily trading volumes on major U.S. exchanges fell 20 percent last year from 2009. The number of firms policed by the Financial Industry Regulatory Authority fell 10 to 4,446 in January, according to data from the regulator. Finra’s membership has declined 11 percent since 2007.

‘Marginal Firms’

James Angel, a finance professor at Georgetown University’s McDonough School of Business, said he expects more brokerages to close. Lower trading volumes paired with the potential for increased regulatory costs from the Dodd-Frank Act and other financial rules are turning investors away, he said.

“As long as trading activity remains weak, the marginal firms will be in trouble,” Angel said in a telephone interview. “Investors are saying, ‘We’re not that bullish on the long-term prospects, and so sinking money into a firm that’s in trouble right now is not a good idea.’”

The weakened trading volumes led to declines in fourth-quarter trading revenue at some of the largest U.S. banks. Morgan Stanley, owner of the world’s biggest brokerage, was the only firm among the five largest Wall Street banks to post an increase in trading revenue excluding accounting gains in 2011. Financial institutions worldwide have announced more than 200,000 job cuts amid declines in trading and investment-banking revenue, according to data compiled by Bloomberg.

Competitive Environment

The banking industry will contract as firms sell or exit businesses amid capital and regulatory requirements, according to Lazard Ltd. Vice Chairman Gary Parr.

“There will be less companies competing in the global wholesale business, but it won’t be by mergers,” Parr said Jan. 27 in an interview on Bloomberg Television. “It will be by a number of firms just departing the business. They’ll be shutting down, they may exit some lines or sell them.”

Smaller brokerages in the equity capital markets businesses are operating in a “very competitive” environment and have been “very stressed” during the past six months, said Reilly of Raymond James, which agreed last month to buy Morgan Keegan & Co. from Regions Financial Corp. for $930 million. The deal combines two of the U.S. Southeast’s biggest brokerages.

Closure Announcement

WJB Capital called its employees into a meeting on Jan. 3 to notify them about the shutdown. The company had been “unable to raise capital in a manner that would have allowed the firm to continue its operations given the current climate and the constraints that would have been placed on everyone,” CEO Craig A. Rothfeld said in an interview at the time.

The closures of WJB Capital, Ticonderoga and Kaufman followed the Oct. 31 bankruptcy of MF Global Holdings Ltd., brought on by margin calls and bank demands for money after it revealed a $6.3 billion bet on the bonds of Europe’s most indebted nations.

To contact the reporter on this story: Laura Marcinek in New York at

To contact the editor responsible for this story: David Scheer at

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