Canada’s small brokerage firms will be forced to shut down or combine if the country’s lackluster capital markets don’t improve, said Ian Russell, chief executive officer of the Investment Industry Association of Canada.
More than a third of Canada’s 185 so-called boutique firms have been losing money in the past two years, estimates the association, which represents the nation’s securities firms.
“That can’t go on for a long period of time,” Russell said in an April 5 interview at Bloomberg’s headquarters in New York. “Many firms are reaching the end of the tether and we’re going to see an accelerated pace of acquisitions or firms just turning out the lights.”
Canada’s smaller firms have seen revenue shrink by about a third to C$4 billion ($3.93 billion) in 2012, down C$1.7 billion from levels in 2006-2007, according to an IIAC report from March. Retail revenue among boutiques has fallen about 20 percent from the 2006-2007 highs, mainly from falling brokerage commissions.
“Financings have fallen off, M&A activity has fallen off, IPOs, and the retail investors retrenched,” Russell said. “It’s really a reflection of what’s going on in the commodity market.”
Canadian initial public offerings and secondary stock sales fell 32 percent in the first quarter from the year-earlier period, the slowest start since 2008, according to data compiled by Bloomberg. The decline comes after stock sales slumped to their lowest level in four years in 2012, slipping 9.4 percent to $26.3 billion from 2011.
Takeovers are also down, challenging firms relying on advising companies on deals. Canadian companies were involved in announced acquisitions valued at $31.2 billion that were pending or completed in the first three months of this year, down about 38 percent from the year-earlier period, Bloomberg data show. It was the slowest quarter for takeovers since the fourth quarter of 2009.
“Both the retail boutiques and the institutional boutiques have really taken it on the chin,” Russell said.
Costs from regulation have eroded revenue across the industry, according to the Toronto-based association, which represents securities firms.
Smaller brokerages in the U.S. are also struggling as money managers trade less and execute more transactions electronically. Money managers pay about 7.3 cents to trade $100 of stock, down from 10.6 cents three years ago, according to Investment Technology Group Inc.
ThinkEquity LLC, the San Francisco-based investment bank, Rodman & Renshaw LLC and Avian Securities LLC are among the firms that closed last year. Gleacher & Co., a 220-person investment bank in New York focused on debt trading, has been struggling to stem defections to larger firms as clients question its strategic direction.
Even Jefferies Group Inc., an investment bank which employed more than 3,800, agreed last year to sell itself to Leucadia National Corp. to strengthen its balance sheet and guard against market turmoil.
Russell says it’s “critical” for Canada to create a single securities regulator instead of the patchwork of 13 provincial and territorial agencies that oversee the industry.
“It will improve the cost efficiencies of regulation, it’ll improve the accountability, it’ll improve the responsiveness of the rule-making process,” he said.
Canada is the only member of the Group of Seven nations without a national securities watchdog. The lack of a single, national regulator is hampering Canada’s ability to exert influence on global regulatory reforms, Russell said.
“We have a capital market that has evolved to be fully national, both for small businesses and large businesses and investors, and international in its dimension, and yet we’re stuck with this relic of a regulatory framework that’s local,” Russell said.
The IIAC has about 200 members, including bank-owned investment banks, independent securities firms and boutiques employing almost 40,000 people.