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Another quarter of depressed results is eating away at all but the largest Canadian brokerages.

What's striking in the most recent industrywide results released by the Investment Industry Association of Canada is not just the shrinking profits, but what that's doing to the ability of firms to absorb further hits. The capital base at smaller dealers is steadily shrinking.

The industry as a whole made a profit, but for recent quarters that aggregate number has disguised losses at some firms. Whole swaths of the securities industry, especially in the category of smaller institutional dealers, have been losing money. These are the firms that deal mainly with big institutional accounts such as mutual funds, handling their trading and selling them new stock issues. Both lines of business are very tough right now. For the Canadian securities industry as a whole, equity trading was a money-losing business in the second quarter.

At the institutional firms, three of the last four quarters have resulted in net losses, and a handful of them have shut their doors.

The steady losses are eating away at the capital that firms have set aside to protect against losses. Shareholders' equity for the 82 firms in the institutional category now stands at $3.87-billion, or just over $47-million per firm. Three and a half years ago, firms had an average of $55-million of capital.

Short of making profits that can be socked away, the only way that number rises again is if the owners of the brokerages put in more money. Anecdotally, that's been happening, but at some point the owners don't want to throw good money after bad.

The concern is, as IIAC head Ian Russell notes, that at some point the ability of Canada to finance its economy is hurt. Smaller institutional firms have been the first to finance many smaller companies, before they grow into the bigger enterprises that get backing from bank-owned dealers and large foreign investment banks.

However, without capital, it becomes much harder for the small institutional firms to provide that financing. Underwriting stock issues the way they are generally done in Canada requires capital. Trading big blocks of stock often requires capital.

If and when the business does come back, only firms with steady capital bases will be able to quickly recapture the deals they lost.

Meantime, bond trading is boosting the largest integrated firms.

Bond-trading revenue, for example, soared in 2008 and has been at elevated levels since. So far in 2013, bond-trading revenue is rising strongly.

Only eight large integrated firms, a list dominated by the bank-owned firms, control 85 per cent of the debt business.