Rumours of the small brokerage's death have been greatly exaggerated.
It could not be uglier for the dozens of so-called "institutional" brokerage firms in Canada that focus on raising money for small and medium-sized companies, mostly by underwriting stock sales to big institutions such as mutual funds and pension managers.
Most every line of business is down – often on the order of 40 per cent – from where it was in 2010. Everything from trading commissions on stocks to fees for doing deals is in the dumper. Volatile markets mean the deals that do get done have a high chance of going bad, sapping the lifeblood of firms, their capital.
Losing quarters also eat into capital, and there have been plenty of those, as more money goes out to pay to keep the employees coming to work and the lights on than comes in from transactions. About 40 per cent of all firms in Canada booked losses last year, Investment Industry Association of Canada figures show. That's about 80 of roughly 200 firms, twice as many as the year before. Most of those would be in the "institutional" category.
Ian Russell, the head of the industry association, sums it up bluntly: "When you put it all together, the institutional business sucks."
In such an environment, rumours constantly fly of firms that are close to failure, that are being forced to sell, or that are about to be shut down by regulators.
And yet, where are the firms going under, giving up, or merging with rivals? Nowhere to be seen. In fact, institutional firms are proliferating. As of Dec. 31, there were 78. Four years earlier, there were 69.
They are adequately capitalized. The Investment Industry Regulatory Organization of Canada, which makes sure firms have adequate capital to keep functioning, says there has been no significant increase in the number of firms on its "early warning" radar because they are in serious trouble. Industry-wide capital levels, as tracked by IIAC, are as high as they have ever been.
Far from retrenching, some firms are even trying to expand into the teeth of the downturn, such as Beacon Securities. The brokerage, based in Halifax, is reaching out from its Maritime base to build a big full-scale stock-selling operation in Toronto complete with top-tier office space in a landmark tower. An optimist would call it countercyclical. A pessimist would call it masochistic.
One key to success has been having a network of retail brokers (something Beacon has). Firms with that to fall back on have been doing much better thanks to the fees that come in from retail investors, which have been a relative strong point.
But for those that don't have the cushion of retail, the best hope is to cut costs to the bone and try to hang on. Bonuses vanish. Partners may be required to write cheques to meet capital calls needed to replenish battered balance sheets.
Without capital, the pile of money in the bank earmarked for covering losses, firms cannot survive. Once capital drops below a certain point, firms go on the early warning list at IIROC. If they can't fix the problem in short order, regulators can shut them down. And if there is a market rebound, firms whose capital has been eroded won't be able to ramp up as quickly because the size of deals a firm can do is proportional to its capital.
All of that, combined with an outlook that suggests there's no quick rebound in sight, argues for firms that are on the edge to seek partners, or shut down rather than keep tapping partners for cash to soldier on.
But so far, predictions of a rash of consolidation in the brokerage industry (including my own) have been off base.
"It turns on how much staying power these firms have," Mr. Russell said. "There's a lot of factors that come into the equation, [such as]whether they're able to contain their costs relative to the earnings. These guys do write cheques to keep firms going, and it depends on what kinds of deals guys get to sell firms. There's been a real resistance to selling."
Firms do what they need to do to hang on, always optimistic that a return to more normal markets is just around the corner. It is, after all, an industry run by salesmen. Even if profits are in short supply, hope rarely is.