Tough times ahead for the US Brokerage industry?

The billionaire owner of Interactive Brokers claims confidence in the future of the brokerage industry is in jeopardy due to greater regulation, spiralling costs and a drop in revenues.

An industry leader, Mr Peterffy was among the first to embrace technology in order to widen equity market access for investors. His approach was crystallised in the founding of Interactive Brokers almost 40 years ago. The methods he championed have become central pillars of today's financial ecosystem, enabling US stocks to be traded efficiently and at low cost.

Speaking to the Financial Times online, Mr Peterffy underlined how ever-tightening rules are choking about 4,000 securities companies, with only 20 per cent of these looking as though they might survive. 

"The brokerage industry has become incredibly efficient. It's all about taking costs out of the system... there will be fewer and bigger firms. Trading will be extremely cheap and efficient, and there will be more semi-automated trading algorithms."

As commissions are forced down and prices are pushed up due to advancements in technology, the sector looks set to become increasingly competitive. Furthermore, passive investment strategies are becoming the choice of investors, at the expense of individual stock picking. 

These factors, combined with increased regulatory supervision, are cranking up the pressure across the industry. Fred Cannon, Director of Global Research at KBW said: "Everyone is feeling the cost pressures... there will be more consolidation to come... there is excess capacity in the industry."

Cull predictions mark the high point of reduction trend that has been developing for some time; since 2011 almost 500 US brokerage firms have vanished from the registration pages of the Financial Industry Regulatory Authority.

Eric Noll is Chief Executive of US brokerage, Convergex. He said that the situation amounted to a question of scale. "Increasing competition has brought rates under pressure, there is more regulation, and more technology investment... Everyone is looking for new and better ways to run their business."

Mr Noll maintains that advances in tech will nurture an environment in which smaller, more agile firms will be able to adapt and thrive. On the other hand, the 'big five' brokerages - Scottrade, TD Ameritrade, Charles Schwab, Fidelity and ETrade will find things tougher going.

"The industry has overcapacity and costs have come up, but small, innovative players can still flourish", he added.