Services Allied With the Exchange of Securities or Commodities, NEC

SIC 6289

Industry report:

Services allied with the exchange of securities and commodities, not elsewhere classified, include companies that support financial markets. This industry excludes firms that provide investment advice or offer investment research and management services. Encompassed are a wide variety of companies that offer expertise in a broad variety of miscellaneous activities.

Commodity and security clearinghouses are corporations established by an exchange to facilitate the execution of trades. This is accomplished by transferring funds, assigning deliveries, and guaranteeing the performance of all obligations. Member firms regularly submit statements to clearinghouses that indicate a net balance in each security or commodity on the exchange, along with the net amount to be paid or received, to balance the member's account.

A securities' custodian is a company, usually a commercial bank, that holds someone's assets for safekeeping in an account. For a fee, the custodial institution may collect dividends, interest, and proceeds from securities' sales, and disburse funds according to a customer's instructions. A quotation service is a firm that provides statements or listings of the prices at which securities trade. These quotes are often the last prices at which trades took place, but they may also be the current bid or asking price.

Transfer agents are another type of company in this industry. These organizations are usually banks or trust companies and are appointed by a second party to transfer its securities. The agent may also maintain current records of securities owners for transmitting dividends, reports, or securities distributions.

This industry originated in the United States in the early to mid 1800s, during the emergence of various U.S. financial markets. The establishment of the Securities and Exchange Commission (SEC), soon after the Great Depression in 1929, boosted many services. The SEC established various regulations that encouraged, and often mandated, the use of many of the miscellaneous services that now exist. The industry realized rapid growth during the post-World War II economic expansion.

Strong securities markets in the 1990s enabled most sectors of the industry to benefit from very active markets through the end of the century. The Dow Jones Industrial Average continued to reach new heights throughout the late 1990s, zooming well past the 10,000 mark. However, after trading activity peaked in 2000, a recessive economy, coupled with the terrorist attacks of September 11, 2001, sent the industry into a downward spin for 2001 and 2002. In these years, the clearing industry suffered from a combination of increasing costs as transaction systems continued to advance in technology, increased regulatory scrutiny, and a steep decline in volume. This situation led to increased merger and acquisition activity as smaller firms could not remain competitive and larger firms needed to add revenue to their books without add significant overhead. By 2003, the economy--and the stock market--began to show signs of recovery and, by 2004, was back on a growth track.

In the mid-2000s, the clearing industry was characterized by ongoing consolidation, advancing technology, and increasingly complex and careful regulatory oversight. Ongoing consolidation within the industry led to bigger firms with a broader range of product offerings. Along with these large, process-oriented clearing firms is another sector of smaller clearinghouses that provide full-service, advice-giving brokerages.

According to the financial research services firm TowerGroup, in 1995, about 66 percent of brokers-dealers employed the services of a clearinghouse. By 2003 that number had grown to 72 percent, and in 2005, an estimated 80 percent of brokers-dealers used clearing firms to process their transactions. The primary reason for the shift toward clearinghouses was that keeping up with the advancing technology became too capital-intensive to keep self-clearing a cost-effective option for most broker-dealers. The trend toward clearinghouses has benefited the industry, but the limited number of potential new clients has led to significant competition, as well as the use of mergers and acquisitions to grow revenues.

As the securities industry moved rapidly toward electronic transactions, the clearing industry responded by providing clients with integrated programs to handle a wide variety of needs. In April 2005, the Securities and Exchange Commission's adoption of the National Market System, known as Regulation NMS, effectively pushed the industry toward integrating electronic trading systems. With regulatory oversight a matter of significant concern, many brokers-dealers relied on clearinghouses to help them stay both productive and within regulatory guidelines. "Correspondents need all the help they can get to address the growing abundance of compliance requirements," Jane Wollman Rusoff noted in Research in April, 2005. "And clearing companies are at the ready with new technology--such as computer software applications--so broker-dealers can file more timely transaction reports." This transition to Regulation NMS continued through early 2007.

According to the U.S. Census Bureau's 2008 County Business Patterns, there were 2,706 firms operating within the trust, fiduciary, and custody activities sector in the United States with industry-wide employment of 47,752 people. The majority of firms were located in California, Texas, and New York. Additionally, there were another 828 firms operating in the miscellaneous financial investment activities sector employing 11,633 people, with the majority in Texas and Illinois.

D&B Sales & Marketing Solutions reported 897 establishments engaged in furnishing services to security or commodity holders, brokers, or dealers, not elsewhere classified in 2010 with industry-wide employment of 20,338 workers and sales totaling $1.791.5 million. On average, each firm generated $2.3 million while employing 24 people.

In addition, 197 security and commodity service firms held 22 percent of market share, while 245 financial reporting firms represented 27.3 percent of the market. Stock transfer agents numbered 98 firms with 10.9 percent of the market and 88 protective committees firms captured 9.8 percent in share. Additionally, there were 85 security custodians firms that constituted 9.5 percent of the market. There were 18 security exchange clearinghouses, compared to a total of 16 commodity exchange clearinghouses.

In the late 2000s, the Dow Jones Industrial Average (DJIA) was on a roller coaster ride as the financial market was headed toward collapse. Beginning with the news of the failure of Lehman Brothers and Merrill Lynch in September 2008 followed by the rescue of AIG, the DJIA fell 39 percent by October 2008. On October 14, 2009 the DJIA closed above 10,000, the first time since October 3, 2008. Trading activity began to resume by late 2009 and by October 14, 2008 the DIJA closed above the 10,000 mark for the first time since October 3, 2008.

As the financial crisis unraveled, overall financial reform was at the forefront of the financial services industry, including the securities industry especially when it comes to transparency. Under the Emergency Economic Stabilization Act of 2008, financial organizations were required to report "cost basis" to both the Internal Revenue Service and to taxpayers that ultimately led to those affected scrambling to meet the qualifications. The deadline for securities was slated for early 2011 and those who have never utilized cost basis may need to spend as much as $5 million to become compliant.

The Depository Trust and Clearing Corporation (DTCC) introduced its Cost Basis Reporting Service (CBRS), AccuBasis first introduced in 2007. "The service acts as a central communications hub that transmits cost basis information among broker/dealers, transfer agents, issuers, mutual funds and custodian banks in a secure electronic environment." The bottom line, every time assets move among firms "financial intermediaries" have to distribute "cost basis information' among each other.

Additionally, SunGuard Data Systems Inc. also launched its latest product "�that can work in any back-office system or combination of systems to meet new cost-basis-reporting requirements," SunGuard's "Cost Basis Reporting Engine."

According to Standard & Poors, "clearinghouses now face the prospect of major regulatory reforms in the U.S. and Europe--not to correct past missteps, but to become more prominent and critical components of the financial system infrastructure." In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 promises to play out over the next two to five years with sweeping reforms.

Three of the industry's biggest firms in the late 2000s were SunGard Data Systems, The Depository Trust & Clearing Corporation (DTCC), and Broadridge, a subsidiary of ADP. SunGard, which processes a majority of all NASDAQ trades, about 5 million a day, reported an adjusted income of $1.15 billion on revenues of $4.9 billion in 2007. The DTCC, the world's largest securities depository and a clearinghouse for trading settlements, had 2006 revenues of $1.36 billion. The 2006 value of securities settled through the DTCC was an astounding $1.5 quadrillion. Broadridge, which was spun off by ADP in 2007, had 2007 net revenues of $2.1 billion.

The DTCC reported revenues of $960 million in 2009, a decline from $1.36 billion reported in 2007. Additionally, the company settled $1.48 quadrillion in securities transactions. SunGard reported revenues of $4.99 billion in 2010, a six percent decrease compared to previous year. The company services more than 25,000 customers in about 70 countries with over 20,000 employees. Broadridge reported revenues of $2.2 billion in 2010, an increase of seven percent compared to $2.0 billion in 2009 with 4,000 employees. On average, the company processed more than 1.5 million equity trades daily and more than $3.5 trillion in fixed income trades daily of U.S. and Canadian securities.

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