"The broker-dealers are the toll collectors of trading volume"
Even though it is devoid of any high-flying tech stocks like Apple or Google, the NYSE ARCA Securities Broker/Dealer index, with the ticker symbol .XBD, has managed this year to keep pace with the broad S&P 500 stock index.
As of 10:30 Wednesday morning, the S&P 500 this year was up 24.3%, reaching a fresh high of 4,775.
Meanwhile, the broker-dealer index was up 22.8% for the year, hitting a daily high on Wednesday morning of 551.85, a day after it reached a new 52-week high on Tuesday of 552.14.
According to Yahoo! Finance, the NYSE ARCA Securities Broker/Dealer Index has 18 stocks in it, including Morgan Stanley, The Charles Schwab Corp, LPL Financial Holdings Inc., Ameriprise Financial Inc., and Raymond James Financial Inc., companies that collectively do business with tens of thousands of financial advisors.
“The performance of the broker-dealer index is not really a surprise because it traditionally correlates to the S&P 500,” said Rob Isbitts, founder of ETFYourself.com and a former financial advisor and fund manager. “Recently, the couple of times the XBD outperformed was during 2018 and late 2020 into 2021. Those were pretty dramatic periods in the market.”
“The broker-dealers are the toll collectors of trading volume,” Isbitts said. “We saw in 2023 strong trading and a bounce back year from 2022. As the stock market goes, so go the fortunes of the broker-dealers.
The brokerage industry is notorious for booms and busts, with the latter often ending in spectacular flameouts and crashes of firms that sold too many questionable and at times, bewildering products, from dubious medical receivable private placements to complex credit default swaps.
For example, 2021 was a record breaking year for revenues and profits across the retail brokerage industry as the country started to emerge from the Covid-19 pandemic. Then, broker-dealers in 2022 weathered a terrible year, with the S&P 500 dropping 18%.
“The S&P 500 turned out better than many expected this year, but nevertheless there is still a cautiousness in the industry because people are worried the market could turn,” said Alois Pirker, an industry consultant. “Certainly, the industry is continuing to watch the discussion of interest rates at the Fed closely.”
Broker-dealers profit from cash held in client accounts, margin loans used to buy more securities and banking activity in general. The recent spike in interest rates from near zero at the start of 2022 to more than 5% has been welcome news for brokerage firms.
Pirker noted that the time of the pandemic was a boon to some firms getting new clients, as investors were stuck at home, had plenty of time to shop around for a new financial advisor and were wondering about their own mortality.
“This year that flow of new clients has slowed down a bit, and the large conglomerates are trying to cross sell into different business lines just as the industry continues to see consolidation, like Osaic buying Lincoln Financial Advisors,” he said. “And it’s inevitable more consolidation will happen.”
