Deregulation in the financial services industry has generated a great deal of curiosity about the shares of publicly traded brokerage firms. The paucity of solid information about such shares has not prevented the development of several widely held views regarding their behavior. It is, for example, commonly supposed that brokerage firm shares are riskier than the securities of other issuers, that they rise and fall in price with increases and decreases in overall trading volume, and that they lead broad market swings.
An empirical investigation of the stock of the eight brokerage firms that have listed on the New York Stock Exchange since 1971 confirms the belief that brokerage firms have higher degrees of systematic risk. For the 10-year period examined, all eight firms had average betas greater than one. Moreover, the yearly betas exhibited substantial fluctuation over time, with the changes being consistent across the firms. The results also indicated that the returns on brokerage firm shares are on average positively related to trading volume. However, an examination of the lead-lag relation between the market (the Standard & Poor’s 500) and the brokerage firm shares does not support the belief that brokerage firms are leading indicators.