Profits floating away
If there is anything that has grown more inevitable than regulation it is a low interest rate environment. And while many brokers may have lessened their dependence on interest income (the float), it has been an important profit driver for firms. No one could have predicted a zero interest rate environment lasting from 2008 through 2013.
"Every firm is dependent on float. It’s part of our business model.We certainly make money on transactions, but float is hugely important to us, as it is to every FCM," Nagel says.
Gordon adds, "It is just something that FCMs have to deal with. We are prepared for the environment whatever it may be. We constantly are tweaking our operating model and if anyone doesn’t do that they are going to struggle."
The bottom line appears to be that interest income will not be part of a viable business model for the near term.
IB returns interest income to customers after the first 0.5% and does not depend on the float. "A broker should be able to provide their services in exchange for a commission," Peterffy says.
Like some other firms, optionsXpress’s profitability is not dependent on float and O’Neil points out that this environment will not last forever. "[The float] isn’t dead, interest rates won’t be down forever. Interest always will be an important component of profitability," he says.
However, not everyone agrees. Breteau says even when rates eventually come back up, they may not be the driver of profits they were in the past. "The rules in terms of segregation will continue to evolve. The rules in terms of what banks and brokers will be allowed to invest in with client money will continue to be more and more stringent," Breteau says.
The MF Global situation likely will lead to much tighter rules on seg funds and brokers will not be as free as they have been in the past to earn interest on their customer funds held in segregation.