Consolidation in Iran Stock Brokerage Industry

Full-service stock brokerage industry in Iran’s capital market has recently come under pressure.

There are mostly two main key drivers for this: regulatory compliance and ongoing quest for scale from both buyers and sellers.

Over 100 stock brokerage firms are conducting trade in Iran’s four securities and commodity exchanges with a market cap of almost $150 billion (nearly 35% of Iran’s GDP). Considering significantly low fragmented liquidity measures, total active registered trading codes and comparing all mentioned figures with capital-market penetration rate in domestic economy (almost below 10%), one can figure the market share for this industry in Iran’s overall economy.

Global capital markets are experiencing a revolution driven by technology and fundamental changes in market structure. Iran’s capital market with 50 years of history is no exception.

Most stock brokerage companies have started to target higher-value clients, cutting off the retail business and generally, the industry has become high on cost and low on returns. Liquidity measure has become a major concern, yet it could be developed by digital transformations. Blame it on the lack of market growth in total or pressures on yields, the brokerage industry is in a tight spot.

We see growth trends on fund establishments and ETFs from the sell-side, and increasing changes from the buy-side, making brokerage services face unforeseen challenges.

To name a few changes and shifts, demographic challenges of recruitment in financial advisory and other capital market sectors would cause small firms a great challenge facing technological advancements like algorithm trading, high frequency trading and other platforms with minimal direct human contact in a very near future.

Buy-side traders would be under immense pressure in marketplace and anticipate their brokers to add value to their trade, provide them with high-quality market intelligence and innovative technology R&D to help enhance their performance.

Unsurprisingly, brokerage shareholders are looking for lucrative alternatives in order to maximize their returns on such circumstances.

 Merits of M&A

Mergers or acquisitions in the stock brokerage industry would have both advantages and considerable rewards that should be identified for further improvement of all parties involved within the Iranian financial markets. Although a lack of key findings exists, diversification and expansion of Iran’s capital market would create more low-yield businesses for brokers that only push firms for the sake of scaling.

Larger brokerage firms could survive sailing on the tide with the help of automation and digitalization business models and smaller firms can rely on their high net-worth clients. Conversely, the ones that are mainly in crisis are midsize broker firms that need cash flows.

 Internal vs. External Expansion

There are different strategies for expansion, but they are mainly categorized as internal vs. external. External expansion strategies like M&A have shown proven results with solid quantifiable measures to set desired adjustments accordingly, rather than experiencing trial and error policies by implementing internal expansion strategies.

Additionally, as cost and complexity of regulation and technology grow, the acquirer can typically eliminate significant terminations within a target’s back-office function, improving operating efficiencies by supporting its operations infrastructure.

Similarly, a merger can often improve the client service model by gaining access to the superior technology, compliance operation and broader product suite of a larger and deep-pocketed partnership.

Consequently, consolidation by larger brands with brand loyalty and reputation in the market would make startups and fintechs get more exposure and solid funding support to conduct better research, develop more diverse technologies and devise innovative solutions.

In order to name a few highlights on M&A rewards for Iran’s brokerage industry, firms could pay attention to cost-saving approaches, revenue enhancements, more efficient performance, attracting new clients and maintaining more market share.

Accumulating more resources for dominant expansion or market coverage would ultimately lead to higher portion of capital market economy orientation versus banking economy orientation and eventually could improve the penetration rate of capital market in total economy as a key driver for sustainable growth or even represent the industry globally.

In this regard, major roadblocks to let such consolidation happen are corporate cultural differences and most significantly the current regulatory practices on M&A operations in Iran.

The execution of any merger or acquisition, regardless of the price value for the matter of consolidation in financial industry in Iran, could surely support expansion of the industry.