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Volatility expected to benefit some broker/dealers' Q1 results, harm others

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Volatility expected to benefit some broker/dealers' Q1 results, harm others

Thevolatility that plagued equity markets for much of the fourth quarter of 2015continued into the first quarter of the new year, discouraging M&A andcapital markets activity and lowering analysts' expectations for mostbroker/dealers' earnings.

Marchbrought some relief to the quarter, Credit Suisse analysts said in an April 1note, but that improvement came from a low base. On the whole, investmentbanking fees "declined markedly," they wrote, including a 47%decrease in equity underwriting volumes year over year, and a 23% drop inM&A-related fees compared with the prior-year period.

Inan April 8 note Credit Suisse analyst Ashley Serrao wrote that M&A-focusedbrokers like Greenhill & Co.Inc. and EvercorePartners Inc. have strong backlogs going into the second quarter of2016 but had few deals to advise on in the first quarter.

Serraolowered his price target for Greenhill to $18 from $24 and swung his quarterlyestimate to a loss of 5 cents per share from a gain of 24 cents per share. Healso lowered EPS estimates for Evercore, Lazard Ltd and 

Greenhill'sstock has plunged since summer 2015, losing half its value during that time. Itclosed at $19.49 on April 19, near its 2004 IPO price of $17.50 and well offthe all-time high of more than $95 it achieved back in October 2009. Thedifficult first quarter raises "another question mark over strategy andthe future of the firm," Serrao wrote.

Acut to the Greenhill's dividend may be in order, since it is significantlyhigher than those of its peers, Serrao said. Greenhill's cash position is alsopressured by debt service related to its acquisition of Cogent Partners, which will total $16.9 million in 2016,according to Credit Suisse. Goldman Sachs analyst Daniel Paris has alsoquestioned the sizeof the current dividend.

Forsome brokers that rely more on trade execution, volatility helped drive upbusiness. Investment TechnologyGroup Inc. saw average daily trading volumes rise 30% from theprevious quarter, Sandler O'Neill + Partners analyst Richard Repetto wrote inan April 13 earnings preview report. The broker's market share rose steadilyduring the quarter as it moved to rebuild customer relationships damaged byregulatory action, Repetto said. In August 2015, it reached a with the SEC over itsproprietary trading pilot program, which operated for 16 months in 2010 through2011. ITG paid a civil penalty of $18 million.

Onaverage, analysts expect ITG to return to positive EPS of 6 cents in the firstquarter of 2016. In the prior quarter, it reported an operating loss of 7 centsper share.

High-frequencytrading firm Virtu FinancialInc. also benefited from the uptick in tradingactivity during the quarter. Repetto expects net trading income to be up 26%quarter over quarter, with increases in five of Virtu's six trading asset classes.

, anotherhigh-frequency-focused broker, could see revenue from market-making services inthe U.S. jump 31% quarter over quarter on higher trading volumes, Repettowrote. The Sandler analyst expects revenue to be flat compared with the firstquarter of 2015. Expenses will likely rise with revenue, though, and managementhas said controlling costs is its top priority.

Sharesof LPL Financial HoldingsInc. have steadily recovered since hitting all-time lows inFebruary, and the company has taken early steps to prepare for the Departmentof Labor's fiduciary standard for financial advisers. The company is loweringthe fees its adviserscharge clients to prepare for the rule, which is widely expected to for commission-based retirementproducts. LPL's new fee structure is expected to lower the cost of accessingfinancial advice through its advisers by up to 30% for some investors, thecompany said in a March 16 press release.

Therule, which was releasedon April 6, may not be as punishing for retail brokers like LPL as the industryfeared at first. The final rule includes a grandfathering provision that allowsassets already under management to continue earning fees, as long as thoseaccounts meet the best interest rule, Keefe Bruyette & Woods analystRyan Krueger noted in a report following the rule's release.

"However, while brokers are permitted to generatecommission and fees from their historical business lines,"Krueger wrote, "we still expect the heightened regulatory backdrop willtranslate to reduced sales and increased compliance costs for retail brokers."

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