Another Brokerage Bites the Dust: Is Wall Street In Trouble?

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Wall StreetAccording to Warren Buffett, the United States dodged a bullet back in 2009. We didn't fall into a double-dip recession, and we won't be heading back into one anytime soon, either.

Just don't tell that to the stock brokerage industry.

Over the past couple of weeks, quietly and with little fanfare, three separate small brokerages bit the dust. In January, WJB Capital Group and Ticonderoga Securities both announced that a dearth of trading activity on the stock markets and a lack of capital in-house required them to close their doors and cease operations -- increasing the ranks of unemployed bankers by a couple hundred in total. Last week, we lost a third broker when Kaufman Bros., a highly regarded, minority-owned firm that played a key role in helping the U.S. government liquidate its stakes in the banks bailed out during Troubled Asset Relief Program, would also turn out the lights.

On the one hand, this may not matter much. (Raise your hand if you've ever even heard of "WJB Capital" before reading this column.)

But here's the thing: This could be only the beginning.

A Trend Emerges

The Wall Street Journal keyed into the emerging trend last week. Polling industry insiders, the Journal warned that things are apparently not well up on Wall Street.

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Previously, the failures of tiny brokers like Soleil Securities (absorbed by Ticonderoga last summer) and Gleacher & Co. might have been written off as aberrations. Now it looks like they were harbingers of doom -- and the failures of WJB, Ticonderoga, and Kaufman could be just the leading edge of "a wave of closures among brokers that rely on trading volume to generate revenue."

When the Journal first caught wind of this story, at the time of the Ticonderoga and WJB closures last month, the newspaper warned that "two other firms" -- unnamed at the time -- appeared to also be in peril. It would now appear that Kaufman was one of the imminent victims. The other may or may not be Susquehanna Financial Group, which last month laid off 15% of its stock traders, citing a lack of trading volume in the markets.

Even Larger Problems Loom

For the time being, it appears the tremors on Wall Street are taking down mainly the small fry. But bigger names in the industry, including Morgan Stanley (MS) and Goldman Sachs (GS), have also warned of weak revenues, and responded by laying off staff and cutting compensation for the brokers who remain.

It may not end even there. According to the Journal, a lot of these little firms, and Ticonderoga in particular, have historically specialized in placing trades for the hedge fund industry. If the brokers who handle their business are in trouble, therefore, it stands to reason that the customers who place the trades with these brokers may not be in the finest fiscal health, either.

Green is Good, Right?

Down here on Main Street, we're for the most part oblivious to the goings-on up in the rarefied air of Wall Street finance. We see the Dow Jones Industrial Average going up -- as it's done for most of this year so far -- and think everything must be going fine and dandy with the stock markets.

It's not. Indeed, according to Businessweek, "trading volumes on major U.S. exchanges fell 20 percent last year from 2009." That's bad news for brokerage firms like WJB, Ticonderoga, Kaufman, and all the rest, which depend on the commissions they collect from placing trades, to pay their workers and stay in business. But if trading volumes are down enough to put these firms out of business, what does this imply for the gains we're seeing on the Dow?

Motley Fool contributor Rich Smith does not believe in the rally. And he doesn't own shares of any company mentioned above, either. He does, however, have a large store of canned goods and potable water stacked up in the basement. Motley Fool newsletter services have recommended buying shares of The Goldman Sachs Group.


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