The Impact of COVID-19 on Broker Dealers (And Where It Hurts)

It has been a long and grueling 3 months since the first COVID-19 case reared its head in the United States. When the first deaths were reported, no one could have predicted the global impact it would have. Quarantine efforts in China were minimized but once the disease began to rapidly expand, it became obvious this was to become a global concern.

As Americans, we are confident in our ability to combat any invader. We’ve braved tough foes throughout the years, but this silent enemy doesn’t abide by any code nor creed.

After analyzing the effects of COVID-19 on brokerage firms, we ascertained three perspectives on what to anticipate from the fallout of this pandemic, how brokerage firms have adapted, and when we should expect to see the light at the end of the tunnel.

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REGULATION

The coronavirus pandemic caused widespread concern and economic adversity for broker-dealers across the US. As every news outlet reported on the emerging market volatility around the world, the Financial Industry Regulatory Authority (FINRA) went into hyperdrive and began to churn out regulatory updates to the financial markets.

The first notice, Regulatory Notice 20-08 (Pandemic-Related Business Continuity Planning, Guidance, and Regulatory Relief), provided both guidance on pandemic preparedness and regulatory relief to impacted member firms. This measure aimed at ensuring broker-dealers were in a position to address a wide range of possible effects in the event of a pandemic, such as absenteeism, telecommunications disruptions, remote work arrangements, and other effects.

While firms have experienced increased customer call volumes and online account usage during this pandemic, FINRA and the Federal Reserve have been responsive to ensure customers have access to funds and securities.

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WORKFORCE

Broker-dealers acted swiftly as they were committed to preserving the well-being of their teams. Firms started by placing notices on their websites to keep customers updated on inquiries regarding trade execution, account usage, and other concerns regarding customer communication.

Things changed when the state governments started to shut down non-essential businesses. Eventually, these measures reached the offices of broker-dealers and other financial institutions, pressing them to rethink their priorities in favor of health.

This shifted the work environment for many brokerage firms. What was once thought as an impossible task for many became a reality as financial services companies transitioned to a newfound office space – working from home. Regarded as the new medium, remote office work (or telework arrangements) has taken over the lives of many in the financial services industry.

This new process has affected the supervisory system for firms, as they had to adapt to supervise the activities of their associates working from a remote location. This process involves addressing the risks associated with working remotely, including customer privacy, information security, and record-keeping considerations.

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One such broker was already well-positioned for the new requirements. “Our communication process hasn’t really changed much since we mostly use email, which hasn’t shifted,” says Terry Dolan, Principal at Southern Trust Securities. “Most of the clients are self-directed through an electronic system, so we don’t have to work with them on a per-order basis as they leverage our mobile app to trade directly.” Terry also commented on the welfare of his customers, noting that they can access a customized support portal should they have any issues. “Our situation is not that bad, and I think we’re luckier than other firms who depend on the office space.”

TECHNOLOGY

The uncertainty of global financial markets sparked new technology solutions. The high levels of volatility among the global financial markets have resulted in trading systems and development timelines to become stressed. To accommodate changes associated with the pandemic, brokerages have successfully tested complete at-home workstations.

“Initially, this brought up logistical issues like communications and following proper standard protocol procedures, so working in tandem was a challenge at first,” says Terry. “However, client focus is important as we’re needed to serve our clients and trade for them, so working from home needed to be seamless so that our clients can retain confidence in their accounts. Now, with our new tools and process, I can easily engage with an account and request information from someone in Arizona as well as I did before when we worked in the office.”

On top of these problems, there is the risk of a customer privacy breach as disjointed remote offices may not be as secure when compared to a managed in-office network. Cybersecurity is a major priority for brokerages as technology infrastructure may be stressed due to more employees working remotely for extended periods. Adding new technology elements to deal with outsized volume could also create new cybersecurity risks as phishing attacks related to COVID-19 are rising.

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CONCLUSION

Most companies have contingency plans that are prepared for multiple scenarios, but those may not fully address the fast-moving variables of an outbreak like COVID-19. Typical business continuity plans do not consider the widespread quarantines, business closures, and travel restrictions of a global health emergency like this one.

We won’t let this stop us from moving forward, as workers are slowly going back to the office environment with protective measures being implemented and enforced.

Michael Higgins1 Posts

Michael Higgins is the CEO at Velox Clearing, a California-based clearing firm, prime broker, and RIA custodian

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