Moody's: Increased profitability underpins positive outlook for US exchanges, retail brokers; market makers stable

The 2018 outlook for US exchanges and other trading venue operators and retail brokers is positive, owing to increased profitability and steady to lower debt leverage for the collective group, Moody's Investors Service says. The 2018 outlook for US market makers and advisory boutiques is stable amid improving profitability but a challenging operating environment, which will continue to impede revenue.

"Exchange operators' financial strength will continue to benefit from diversification," according to Donald Robertson, Moody's Senior Vice President, one of the authors of the report. "Consolidation has reinforced scale at major US exchange operators while profitability and margins are expected to remain strong in 2018."

Other factors underpinning the exchanges and other trading venue operators outlook is increasing demand for proprietary data, the development of differentiated products as well as an eventual increase in trading volumes, which will further improve profitability.

Key drivers of US retail brokers' positive outlook include rising interest rates coupled with higher average interest-earning assets. "Rising interest rates will continue to improve profitability, particularly for brokers affiliated with bank entities," says Fadi Abdel Massih, Moody's Analyst, a co-author.

Moody's says the 2017 price war drove average commission per trade downward, however, trading activity maintained an upward trajectory, which alleviated the negative impact on trading revenue for retail brokers.

In 2017, US market makers experienced tepid volumes and client activity amid subdued volatility. The stable outlook for 2018 reflects the continuation of firms' reengineering and managing expenses to offset lackluster revenues.

"A challenging operating environment persists for US market makers and advisory boutiques, which will hinder meaningful revenue growth," Robertson says. "Low volatility and added transparency are key headwinds for market makers in 2018 as market volatility, which can drive growth, remains low."