Independent Securities Firms Must Find Their Competitive Advantage over Financial Holding Company-Controlled Securities Firms by Differentiation

Financial holding company-controlled securities firms have advantages in crossover expertise, information, channel network, economies of scale, market influence, and others. They would certainly focus on strategic arrangement and consolidation of strengths in the activities of relatively high returns, such as underwriting and proprietary trading. Subject to existing securities issuance regulations, IPOs remain under strict policy control. Qualified IPO companies that have real prospects to go public are a scarce resource. As a result, the competition is intense in related investment banking services. It is neither necessary nor economical for independent securities firms, especially small and medium-sized ones, to choose such activities strategically. For the purpose of efficiency in the arrangement of financial service resources, policymakers should encourage independent securities firms to focus on the financial needs of regional or particular investor groups and work on segmentation, targeting, and positioning.

The Policy Orientation to Classification-Based Market Access and Oversight Greatly Supports Independent Securities Firms in Diversification

Compared with commercial banks, securities firms produce fewer economic externalities and are faced with less policy control as to market access. Therefore, there is no shortage of securities firms in the market. However, further policy guidance is needed to avoid homogeneous competition and promote differentiated services. In particular, independent securities firms should be encouraged to make the best of their advantages to better meet the needs of more investor groups for differentiated, customized, and diversified services. Their advantages include strong local presence, closeness to investors, better understanding of underlying needs, and flexible services.

Regulators are urged to build upon the existing market access system and explore a more specific limited licensing system. In this way, regulators can use subdivision and restriction according to the connotation of a license to create specific licenses for underwriting, brokerage, asset management, and other activities. They could guide independent securities firms to clearly define their main activities and specialize in a particular field. This would bring about a range of specialized securities firms that belong to different classes, have different expertise, have clear positioning, and also complement each other. It would also help securities firms reduce homogeneous competition and improve specialization. In addition to net capital, regulators could also require securities firms to include their risk indicators, strategic positioning, target customers, geographic coverage, and other factors. Small or medium-sized specialized securities that focus on particular areas, customer groups, and activities (such as brokerage and asset management) should be encouraged to meet the multilevel needs for securities services.

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