Futures industry's changing structure - not good for customers or the markets

The top five FCMs carry 51% of the Customer Seg, those FCMs are Goldman, JP Morgan, SocGen (formerly Newedge), Merrill Lynch and Morgan Stanley.Add in the next five FCMs are the top-10 carry 74% of the Customer Seg balances. Rounding out the top-10 are Credit Suisse, UBS, Citi, Barclays, RJ O’Brien.

At year-end 2003, 177 FCMs submitted FOCUS/1FR reports to CFTC. Ten years later, at year-end 2013, just 102 did. By April 2015, that number had dwindled to just 75.At year-end 2003, 102 FCMs reported to CFTC that they cleared customer business (Customer Seg balances) At year-end 2013, just 69 did. By April 2015, that number had dwindled to just 57.

-from needhamconsulting.com

The statistics above speak for themselves. The futures industry is going through a significant change that will have strong implications for customers. There has been fee compression and profit compression from the zero interest rate environment but regulatory costs since the crisis have also gone up. 

With fewer FCM's, the cost of transacting is going to increase. If you have to find a new FCM, good luck. If you want to find a new FCM at lower costs, forget about it. Concentration is high and the biggest players do not want the smaller firms which cannot generate a minimum amount of brokerage. T If a competitive market mean more choice, the futures industry is getting less competitive. It could be argued that there is still enough competition, but customers have to go to these firms to trade futures. If you want a well capitalized firm as your FCM, the number shrinks. The larger FCM's also do not automatically mean the safest. If you are small and want some service with brokerage, the number shrinks more. 

Small firms and weaker firms will be concentrated into fewer FCM's which means that the risk for the entire system may actually increase. Higher costs means the price of hedging goes up which can increase the risk to the system. Higher costs will reduce liquidity which creates another problem. The ammeter will have to find some equilibrium but we may not like the new world.