Custodial & Trust Services Industry Trends

Consolidation

Expansion of Electronic Trading

To broaden access to capital, investment banks have been merging with other types of financial institutions (for example, commercial banks, brokerages, insurance companies, finance companies) and with international banks. M&As were propelled in part by the deregulation of the financial services industry. In recent years, foreign investment banks have established a firm presence in the US by acquiring US firms.

Securities trading over electronic networks has increased rapidly in the past decade and in some markets has replaced "floor" brokers. In many cases, orders are still executed by individuals dealing with other individuals, but in some systems orders are executed automatically by computer. The NASDAQ is an electronic stock trading system where orders are executed by brokers. A number of electronic communication networks (ECNs) have been formed by brokers or large customers to trade a variety of securities. In 2005, about 11 percent of trading volume on the NYSE was done electronically.

New Lines of Business

Unbundling Services, Fees

To generate steady cash flows, investment banks constantly seek new product lines compatible with their core banking business. Goldman Sachs indirectly owns 29 electrical power plants and actively trades power sales contracts, Bear Stearns operates a mortgage company, and Morgan Stanley owns the credit card company Discover Financial Services and an aircraft leasing subsidiary. These lines of business leverage the expertise normally used to support M&A.

Pressured by customers and regulators, brokers continue to break out the cost of services. Because brokers frequently offer a range of services, fees and commissions may be charged for more services than a customer wants. Many institutional investors are interested mainly in the research a brokerage provides, while others want speedy order execution.

Regulatory Oversight Varies with Business Performance

Increased Regulatory Scrutiny

Common investment bank business practices that are unquestioned one day can receive intense scrutiny the next. For example, the allocation process for equities and fixed income security offerings was questioned when it became public that executives and directors of public companies that were clients of the bank were offered shares in IPOs and debt issues by the bank. Banks have voluntarily given up these practices.

Firms in the financial services industry have experienced increased scrutiny from a variety of regulators, including the SEC, NYSE, NASD, and states attorneys general. Penalties and fines sought by regulatory authorities have increased substantially in recent years. Areas of investigation have included research analyst conflicts of interest, market timing and late trading involving mutual funds, and specialist firms executing their own trades ahead of public bids.