A new report from Boston’s Forrester Research Inc. predicts that 25% of securities dealers will go out of business over the next 10 years, thanks to the changes brought by the move to T+1 settlement cycles.

Forrester’s recently-released report, The Real Benefits Of T+1, suggests that Wall Street dealers currently see the move to next-day settlement as an opportunity to reduce the size of their back offices. “But electronic trading and centralized data will drive greater benefits by lowering dealers1 operating risk and financing costs.”

It suggests that dealers can save more than US$2 million per day in operating risk and financing costs with a move to T+1. But these savings won’t come cheap. It also estimates that individual dealers will spend
US$125 million to achieve T+1.

The report, written by Forrester analyst Todd Eyler, concludes that many dealers will go out of business during the transition. “Unwilling or unable to make the necessary investments to automate the trading process, many dealers will face a double whammy, lower trading revenues and debilitating
operational losses. The result will be a flashback to the 1960s. Although trading volumes on the New York Stock Exchange increased fivefold back then,1,200 dealers ceased operations largely because of error-prone, paper-based approaches to settling trades.” Forrester expects at least 25% of todayÕs 7,500 dealers to exit the securities business over the next 10 years.

Commission revenues will fall as soft dollars disappear, Forrester suggests. “Investors will seek objective research from firms like Sanford C. Bernstein & Co.,rather than conflicted research from the largest dealers. As the trade settlement process becomes automated, investors will no longer pay higher
commissions for trade clearing.”

It suggests that to maintain their trading revenues, “large dealers like Goldman Sachs and Merrill Lynch will create equity trading communities to match large investors directly and anonymously and prevent
performance-depleting front running to achieve superior trade execution performance.” At the same time it expects the most liquid stocks will move from the NYSE to ECNs.

To expedite efforts to achieve T+1 and minimize trading costs, Forrester suggests that dealers should: require traders to communicate electronically, not by phone; rely on new electronic trading platforms like FXall and Atriax to execute and match foreign exchange trades; use application service providers to centralize settlement data; and use risk management software to help centralize and standardize risk data and create real-time capabilities for analyzing their riskiest business processes.