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TORONTO, ONTARIO: FEBRUARY 09, 2012 - Bay Street in Toronto, Ontario is seen here Thursday Feb. 9, 2012. (Tim Fraser for The Globe and Mail) (For ROB story by n/a)

Tim Fraser/The Globe and Mail

Quiet markets, nervous clients and rising costs are cutting profits for Canadian brokerage firms to the weakest levels in more than a decade.

Figures from the Investment Industry Association of Canada (IIAC) for the second quarter show a huge plunge in the amount of money that brokerage firms are bringing in.

Operating profits for Canadian securities firms decreased close to 60 per cent in the second quarter to $510-million, measured against both the first quarter of 2012 and the second quarter of last year.

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Decent bond trading results are buoying the largest firms to some extent, but the smaller firms that depend mostly on share trading and financing are sinking under the weight of declining activity in the stock market.

Unless there is a sharp turnaround – of which there are few signs – the result is likely to be an acceleration in the pace of cuts and consolidation as firms look to save money.

Canaccord Financial Inc., the biggest independent brokerage firm in the country, earlier this week closed half its Canadian offices that deal with individual clients.

The industry is also buzzing with merger talks. PI Financial and Union Securities, two Vancouver firms, have been working on a transaction.

Versant Partners recently found a buyer from the United States, Cantor Fitzgerald. There are now 198 brokerage firms operating in Canada, down from 205 at this time last year.

That number is likely to shrink further.

Firms are struggling with pressures on all sides, said Mario Frankovich, chief executive officer of Burgeonvest Bick Securities Ltd., a mid-sized brokerage and wealth management firm that focuses on southwestern Ontario. He said the industry is facing both a cyclical trough as well as a broader decline in the ability to charge for services, at the same time as the cost of complying with increasing regulatory demands is rapidly driving up expenses.

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Mr. Frankovich said that after the worst of the financial crisis, a bounce-back in 2010 gave firms a financial boost that "rehydrated" parched balance sheets. "It gave hope to a bunch of optimists, and some more resources," he said. However, a slow year in 2011 depleted firms' finances, and now 2012 is taking a bigger toll. "I think you are going to see more of this [consolidation] as the rehydrated balance sheets of some of the dealers start to dwindle."

Still, relative to the waves of pink slips in London and New York, the brokerage industry in Canada has only begun to trim staff. The industry's overall employment is down just 1 per cent from a year ago, at just over 40,000 people. That's about where employment in the industry has hovered for the past five years.

The third quarter is looking a bit better financially, with trading and financing activity picking up. However, unless stock markets surge in the final months of the year, "industry earnings performance for the year will fall short of last year's mediocre results," IIAC head Ian Russell wrote in a letter to members.

The biggest pain is at the smallest firms. The 11 biggest securities firms, which would include bank-owned securities dealers such as RBC Dominion Securities and BMO Nesbitt Burns, made money in the second quarter, albeit a lot less than usual. Operating profits fell by almost half to $520-million, IIAC said.

The so-called boutiques, roughly 180 smaller firms that are much more dependent on stock sales, "are under severe pressure from market conditions, intense competition and relentless cost demands from technology and regulatory compliance," Mr. Russell wrote. More than half of those firms are losing money or just breaking even, he said.

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