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Hedge Fund Monthly
The New Prime Brokerage Landscape
Michael DeJarnette, President
NorthPoint Trading Partners
Jan 2011

The prime brokerage industry has undergone an unprecedented rate of change in recent months.  With overall trading volumes lagging and a heightened focus on compliance and risk controls, prime brokerage firms have either chosen or been forced to change their longstanding business models.  This is especially true when it comes to the smaller introducing prime brokers. Some of these small firms have merged or exited the business altogether; some have opted to save costs by consolidating their custody and clearing relationships, while others have been acquired by larger firms looking to  increase their product offerings and shore up their balance sheets. All of these changes have given rise to a new space that is being called 'mid prime', 'integrated prime' or 'independent prime'. Here is a quick look at how all of these changes impacted the prime brokerage landscape.

For many of the smaller introducing primes who opted to merge, this was done largely in part to create greater economies of scale. For those unable to meet capitalisation requirements, the only option was to close up shop. The end result took the form of clients placing greater scrutiny on the stability and balance sheets of the firms that remained. While hedge fund assets were safely held in custody at their respective clearing firms during these closures, clients of these smaller providers were left scrambling to find new homes. But despite this, these smaller independent introducing brokers still offered a good solution for the very small start-up hedge funds who fell below the minimum asset size requirements of middle-tier prime brokers as well as traditional bulge bracket firms.

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