Continuing Evolution of the Securities Industry
Howard J. Schwartz
Chairman and Chief Executive Officer
Lynch, Jones & Ryan, Inc.

This is a revolutionary time for the securities industry, not an evolutionary one, according to Howard Schwartz, an expert in equities. During his presentation he discussed how recent changes affect all parts of the industry.

For example, the events of 9-11 showed the fragility of the securities industry, according to Schwartz. For more than four days the markets were generally inaccessible because the physical entities involved were off limits. Backup systems preserved data, but business ceased. Protection of infrastructure is now of paramount concern for the securities industry, but he suggested the need for more attention on preserving access during crises.

Aside from 9-11, Schwartz said there are four major drivers influencing the market today:

• Globalism—There are no borders.
• Financial Services Act of 1999—It removed competitive barriers.
• Changing investor demographics—The baby boom generation is aging, a factor driving many financial trends.
• Information technology—It eliminated all information barriers.

Within the category of information technology change is what Schwartz considers the most significant driver: decimalization. Made possible by new technologies, decimalization cost the investment industry $1 billion for improvements to its financial systems. Decimalization also increased visibility, so that there is transparency in transactions. More significantly, spreads have narrowed or disappeared and order execution size has shrunk.

In response, Schwartz said, broker-dealers are getting creative by implementing alternative compensation methods for ancillary services. They also are looking for additional revenue streams to make up the lost spread. Expect firms to charge more explicit fees that will replace commissions. They also will closely manage relationships and jettison unprofitable clients.

Profitability concerns are the talk of Wall Street, according to Schwartz, because profits are down. Decisions on client relations will be based on several factors, including the potential size of the relationship, the availability of alternative sources of revenue, total trading volume and its effect on commission and the client’s capital commitment needs.

Money managers will, as a result, need to pay closer attention to the value they get for the commissions paid. Schwartz suggests selecting a broker by focusing on issues such as the quality of execution, allocations of new issues, research support and idea generation.

Schwartz also briefly discussed the new SEC rules that respond to charges of analysts misrepresenting the value of the stocks they recommend. Companies may take cautious view of materiality and limit flow of information to public, he said. In closing, Schwartz offered several predictions concerning other security firm trends and the market in general.

Schwartz is executive vice president of Global Sales for Equities for Instinet Corporation. He is also chairman and CEO of Lynch, Jones & Ryan, Inc. He has been in the financial services industry since 1968. He developed LJR’s commission recapture concept for pension plans. An internationally recognized expert in the soft dollar and directed brokerage industry, he has testified on these topics before congressional committees. Schwartz received his BS/BA in Management and Marketing from Northeastern University.