In 2011, the broker-dealer industry had over 4,456 firms registered in the US, and this was down from 9,515 in 1987. Of these, 200 firms are members of the New York Stoke Exchange (NYSE). Some of the firms in the industry include Morgan Stanley, Smith Barney, Charles Schwab, A.G. Edwards, and Merrill Lynch, which is the largest full-service broker in the US. Entry in the brokerage industry is not easy, as there are several firms making the competition stiff. Successful firms in the industry such as Schwab have come up with innovative ideas that have given them a competitive advantage over competitors. For instance, Schwab pioneered online trading, and this saw an increase in its revenues and net income.
One of the principal drivers of profitability in the broker-dealer industry is online trading, and this underlined by the fact that in 1995, Schwab’s embrace of online trading accounted for over 84% of all its stock trades. Profitability in the industry is also driven by acquisitions and mergers; Schwab’s profitability was enhanced by its acquisition of U.S Trust and Soundview Technology Bank. On the same note, low-interest rates in the industry help stimulate economic growth, and this leads to profitability. The volume of trading activity is also one of the principle drivers of profitability in the broker-dealer industry.
Changing regulations, demographics, and technology have impacted upon competition in the broker-dealer industry in the last two decades. First, changing regulations such as the deregulation of 1975 that saw the dismantling of a fixed commission structure on securities trade allowed for the emergence of more discount brokers such as Charles Schwab that increased competition in the industry. Second, the increase in population resulted in an increase in the demand for brokerage services, and this led to an increase in the number of broker-dealer firms. On the other hand, technological developments such as online trading embraced by Schwab stiffened the competition in the industry.