Another Brokerage Bites the Dust: Is Wall Street In Trouble?

×
Wall StreetAccording to Warren Buffett, the United States dodged a bullet back in 2009. We didn't fall into a double-dip recession, and we won't be heading back into one anytime soon, either.

Just don't tell that to the stock brokerage industry.

Over the past couple of weeks, quietly and with little fanfare, three separate small brokerages bit the dust. In January, WJB Capital Group and Ticonderoga Securities both announced that a dearth of trading activity on the stock markets and a lack of capital in-house required them to close their doors and cease operations -- increasing the ranks of unemployed bankers by a couple hundred in total. Last week, we lost a third broker when Kaufman Bros., a highly regarded, minority-owned firm that played a key role in helping the U.S. government liquidate its stakes in the banks bailed out during Troubled Asset Relief Program, would also turn out the lights.

On the one hand, this may not matter much. (Raise your hand if you've ever even heard of "WJB Capital" before reading this column.)

But here's the thing: This could be only the beginning.

A Trend Emerges

The Wall Street Journal keyed into the emerging trend last week. Polling industry insiders, the Journal warned that things are apparently not well up on Wall Street.

Previously, the failures of tiny brokers like Soleil Securities (absorbed by Ticonderoga last summer) and Gleacher & Co. might have been written off as aberrations. Now it looks like they were harbingers of doom -- and the failures of WJB, Ticonderoga, and Kaufman could be just the leading edge of "a wave of closures among brokers that rely on trading volume to generate revenue."

When the Journal first caught wind of this story, at the time of the Ticonderoga and WJB closures last month, the newspaper warned that "two other firms" -- unnamed at the time -- appeared to also be in peril. It would now appear that Kaufman was one of the imminent victims. The other may or may not be Susquehanna Financial Group, which last month laid off 15% of its stock traders, citing a lack of trading volume in the markets.

Even Larger Problems Loom

For the time being, it appears the tremors on Wall Street are taking down mainly the small fry. But bigger names in the industry, including Morgan Stanley (MS) and Goldman Sachs (GS), have also warned of weak revenues, and responded by laying off staff and cutting compensation for the brokers who remain.

It may not end even there. According to the Journal, a lot of these little firms, and Ticonderoga in particular, have historically specialized in placing trades for the hedge fund industry. If the brokers who handle their business are in trouble, therefore, it stands to reason that the customers who place the trades with these brokers may not be in the finest fiscal health, either.

Green is Good, Right?

Down here on Main Street, we're for the most part oblivious to the goings-on up in the rarefied air of Wall Street finance. We see the Dow Jones Industrial Average going up -- as it's done for most of this year so far -- and think everything must be going fine and dandy with the stock markets.

It's not. Indeed, according to Businessweek, "trading volumes on major U.S. exchanges fell 20 percent last year from 2009." That's bad news for brokerage firms like WJB, Ticonderoga, Kaufman, and all the rest, which depend on the commissions they collect from placing trades, to pay their workers and stay in business. But if trading volumes are down enough to put these firms out of business, what does this imply for the gains we're seeing on the Dow?

Motley Fool contributor Rich Smith does not believe in the rally. And he doesn't own shares of any company mentioned above, either. He does, however, have a large store of canned goods and potable water stacked up in the basement. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group.



Increase your money and finance knowledge from home

Forex for Beginners

Learn about trading currencies and foreign exchange transactions

View Course »

What Is Your Risk Tolerance?

Answer the question "What type of investor am I?".

View Course »

Add a Comment

*0 / 3000 Character Maximum

12 Comments

Filter by:
bmillermath

Folks just aren't trading these days. Not with our version of Putin in the White House.Lies,deception, laws we'll realize the result of after it's Pelosi passed. Bush gas prices.Oh yes,might as well Washingtom Post-blame him. Executive orders directing our way of life..BY BY Birdie and America.

March 05 2012 at 11:21 AM Report abuse rate up rate down Reply
donnareed4

Not to worry more will crawl out from under a rock!!

March 01 2012 at 11:33 AM Report abuse rate up rate down Reply
lyleva

Way, way too many "middle men" in the financial business. Just look at the masses of people walking around the NYSE floor on CNBC. Over half of them could be replaced by technology if the NYSE eliminated its out-of date structure.

February 26 2012 at 3:39 PM Report abuse rate up rate down Reply
O'Brien Family

Doomsayers will always be with us but I wish they would try to get a pulse of how businesses both large and small are trying so hard to keep people working and be productive in this weak economy. We will recover and the folks who listened to these prophets of doom will learn an important lesson. Dan, Seattle

February 09 2012 at 12:46 PM Report abuse rate up rate down Reply
Richard

Unless the average investor wants to continue to play Russian Roulette, they will divest themselves of stocks and
their up-down lose money trends, go with tax free school-municipal bonds that are insured, the stock market is rigged unless your an inside trader with connections and hooked up to what will happen in 10 minutes, the old saying is now more true than ever, don't invest your money in another mans game, he wins, you lose, more trading firms will go down as investors wise up and go elsewhere for their earnings, stock market is a really bad deal, think before you blow your money on stuff you know nothing about, the broker-trader gets his fees, you get the bad news.

February 07 2012 at 2:50 PM Report abuse rate up rate down Reply
duey35

I went into a bathroom of a fine eating establishm­ent the other day ,and it had a hand drier, one of the eletric types for sanitary reasons. It had a sticker that said push button for an announceme­nt from our president. I think I peed my pants.

February 07 2012 at 2:24 PM Report abuse rate up rate down Reply
jhrooney

Wall Street had an investor bubble just like the housing industry. Everyone traded and invested during the 90's and made and lost a lot of money. The brokers could care less as they got paid by the transaction. Now with the economy weak, people paying off debt and many unemployed, means not that much activity so many brokers, traders have to go just like any other industry. Welcome to the main street, wall street.

February 07 2012 at 1:06 PM Report abuse +3 rate up rate down Reply
frank1946

USA has high taxes going higher, fear about the future (Big Federal DEBT) and a Government attitude of
we hate Profit..........................Tax the Rich !

CR's asking for $ 1.2 Trillion in Federal Debt every Quarter have most Citizens wondering when the crash happens ?

Not to worry, watch ABC, NBC or CNN.

February 07 2012 at 1:04 PM Report abuse +1 rate up rate down Reply
1 reply to frank1946's comment
chris1011

According to The Economist Magazine, one of the main reasons that we are in a pickle now is because we have such a low tax rate on dividends versus earnings on real work. This has resulted in investment made in assets rather than things like manufacturing, which has resulted in several asset bubbles and subsequent crashes (housing bubble, the internet bubble, and before that the Savings and Loan fiasco). Until we value real work over financial dealings, we will not have full employment.

The tax rate on dividends is half what it was during Reagan's term.

February 07 2012 at 1:57 PM Report abuse rate up rate down Reply
Mike

Poor banksters boo hoo, leave the thieving fed res system and exchange their worthless paper for real gold/silver money! We can fire them by our choice of currency! Got gold?

February 07 2012 at 12:46 PM Report abuse +2 rate up rate down Reply
TMCC

watch out there your 401k is going to get its value extracted, and we are supposed to feel sorry for the greedy bastards

February 07 2012 at 12:36 PM Report abuse +2 rate up rate down Reply