Securities Brokers
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Industry Overview
The securities brokerage industry in the US includes fewer than 4,000 companies, with combined annual revenue over $100 billion. Large companies include Merrill Lynch, Charles Schwab, AG Edwards, and the brokerage units of large financial services companies like Citigroup and Fidelity. A typical brokerage office has annual revenue of $5 million. The industry is highly concentrated: the top 50 companies hold over 80 percent of the market.
Competitive Landscape
Demand is driven by the returns of securities markets relative to alternative investments. The profitability of individual companies depends on efficient operations and good marketing. Large companies have economies of scale in operations and high name recognition. Small companies can compete effectively by offering better customer service. The industry is highly automated: average annual revenue per worker is close to $300,000.
The traditional brokerage industry that sold stocks to individual investors has largely evolved into companies that either broker large stock trades for institutional investors or sell a variety of investment products to individuals. Instead of buying individual securities, many individuals now invest in mutual funds.
Products, Operations & Technology
Major services are stock brokerage, investment advice, brokerage of bonds and derivatives, and the brokerage of mutual funds. Stock brokerage accounts for about 50 percent of industry revenue, investment advice for 15 percent, and brokerage of debt securities for 15 percent.
Brokerage includes helping individuals and institutions buy and sell securities, without taking an ownership position in the securities. Brokers accomplish this by belonging to securities exchanges, such as the New York Stock Exchange (NYSE), the NASDAQ, regional exchanges, commodity exchanges, and various dealer groups. In cases where a broker doesn't have direct access to an exchange, transactions are through a secondary broker.
Typically, a broker who receives an order from a customer will communicate with a company employee located at a particular exchange, who will execute the order at the exchange and report details of the transaction to the broker. Customers typically keep their securities in an account with the broker. Brokers charge customers commissions for conducting transactions and fees for maintaining their accounts.
In addition to the basics, full-service brokers may loan customers part of the purchase price of a security, a process known as margin lending, and may loan securities so that customers can speculate on a fall in prices, so-called short selling. Full-service brokers may also provide securities research, investment advice, and money management services. Some brokers also function as securities dealers (buying and selling securities for their own account), as managers of funds, or as investment bankers. Brokers also act as stock underwriters, selling new shares of stock issued by corporations.
Computer technology has been a major factor in the rapid evolution of the brokerage industry. Computer systems handle back-office functions, including customer account reporting and regulatory oversight requirements. High-speed communication networks are used to communicate with securities exchanges and dealers. A large number of securities transactions are conducted on electronic exchanges. Many customers can now conduct transactions and manage their accounts directly through brokerage Internet sites.