Brokerage porters five forces satire

1. Squeeze
Rivalry among Existing Firms
• Race to the bottom due to commodity nature
of service, large number of competitors
• Differentiation through insider information,
ready ignorance of market violations,
willingness to help corporates manipulate
prices
Threat of Substitute Products
• Shift to discount brokerage model shrinks
commissions and size of industry
Squeeze
Squeeze
Squeeze
Squeeze
Threat of New Entrants
• Every enterprising broker who sets up his
new firm thinks he will offer a new level of
“service” (Editor’s Note: New level usually
means a lower level in moral terms)
Supplier Power
• Many brokers compete for corporate
access to a limited number of companies
• For large caps, price upgrades are done in
the hope of moving up the “priority
queue”
• For small caps, brokers try to lock in
special relationships so that they benefit
from being exclusively associated with
the company. This also increases the
chances of a placement in the future.
• Threat of removal of access forces sell-
side analysts to put high target prices
even when fundamentals are deteriorating
Porter’s Five Forces for your friendly neighbourhood broker
Buyer Power (Retail)
• Brokerages earn
commissions when retail
clients trade frequently,
which is detrimental to
long term performance
• Encourage technical
trading and tactical
strategies to promote
turnover
• Distribution of stocks of
mediocre companies to
unknowing clients to
earn placement agent
fees
• Short term outlook and
“memory loss”
syndrome means analyst
are rewarded for bad
calls rather than good
ones
Buyer Power (Institutional)
• Institutional clients realize the
deterioration of research quality,
so they use brokers to collect
inside information and to
outsource labour intensive
modelling work
• Foster competition to narrow
transaction fees so fund managers
can absorb the spread between
management fees and
commission costs