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IIAC president Ian Russell is seen in this file photo.

Not everybody's getting rich in the investment banking game.

Beneath the billion-dollar profits at Canada's largest securities firms, the bank-owned dealers such as RBC Dominion Securities and Scotia Capital, the smaller boutique firms that make up much of the industry are struggling to make a go of it in increasingly treacherous financial markets.

Unless the bear suddenly turns to a bull, especially in the junior markets where many small firms play, there's going to be a cull. Canada's securities business is going to end up even more concentrated in the hands of the players best equipped to survive – the big banks.

According to new figures from the Investment Industry Association of Canada, those hardest hit by current markets are the firms that focus on institutional business such as investment banking and selling stock to mutual funds. There are dozens of these firms around Toronto, Calgary and Montreal, each with 40 or 50 employees, many of whom are also the owners of the businesses.

In good years they share in the riches, an attractive prospect that means that, in general, more firms open every year. In 2007, there were 68 firms. Today there are 78.

But they are fighting for a piece of a shrinking pie. Profit for the country's so-called institutional firms is likely to be down 50 per cent this year, to the lowest level since 2004, IIAC says.

Smaller firms have always had a bigger boom-bust cycle than the larger firms, which have more lines of business to cushion their earnings. The huge bank-owned firms such as RBC and BMO Nesbitt Burns have hundreds of employees and sell the full gamut of stocks, bonds and derivatives to both big money managers and individual investors.

Most institutional boutiques focus on one or two industries, such as mining or technology, and ride up and down with the fortunes of the sectors in which they specialize. The business model is pretty simple: trade stocks to generate commissions that pay the bills, and do a few investment banking deals that bring in the big money to pay the bonuses and dividends.

However, those payouts are increasingly scant. Take the financial crisis of 2008 and now this year's downturn caused by Europe's woes, add to that a shift in investor appetite from small-cap resource stocks that boutiques push to big-cap income stocks that are the preserves of the bank-owned firms, and this downturn is something special.

Investment banking fees have plunged 43 per cent in the first three quarters of the year. Equity trading revenue is on track to be less than half of what it is in a boom year, thanks to a decline in volumes combined with a long-term slide in commissions brought on by electronic trading.

On top of this, costs are climbing as regulators impose more compliance expenses. There are more markets to hook up to, more data to buy, more audits to perform. No wonder smaller dealers are nervous about any higher costs for clearing coming from Maple Group's proposed takeover of TMX Group Inc. and the country's main clearinghouse.

In such times, a string of meagre profits makes building up capital hard. Rough markets increase the risk of losing money on trading or an investment banking deal gone bad, and without the capital cushion to withstand the loss, a firm can't function. For a small employee-owned firm, that means calling on partners to write cheques, or giving up on the business.

Already, the amount of regulatory capital at institutional firms is in decline. As of the third quarter, it stood at $6.55-billion among the 78 firms. In 2010, 74 institutional firms had a total of $7.07-billion in capital.

Not every firm is going to survive. Some may merge. Others may simply wither and die. The increased volatility in markets means many firms are only a bad trade away from disaster.

"The need to build and preserve capital therefore should encourage strategic amalgamations," IIAC president Ian Russell wrote in a December letter to his members.

To be sure, firms scratch and claw to hang on. Perhaps it's the lure of just how good the good years can be. Perhaps it's that the people who own the firms don't know what else to do.

A few more quarters like these though, and firms will begin to disappear.

Most of the partners who gathered together almost 20 years ago to found GMP Securities, arguably the most impressive startup of recent history, will tell you they couldn't replicate that success today. The regulation is too onerous, the costs too high, and the competition from the big banks too fierce.

The small, entrepreneurial brokerage firm surviving on the guile and hustle of its deal makers will always be a big part of Bay Street's lore. But in the current high-cost, revenue-challenged market, it may not be as big a part of Bay Street's future.