Penson boss: Rough patch ahead for retail-brokerage biz

Penson Worldwide Inc., parent of the second-biggest securities clearing firm, is dishing up a dire outlook for the retail-brokerage industry.

“We have concerns about the retail investor for the rest of the year,” Penson chief executive Phil Pendergraft said Friday in explaining the company’s second-quarter loss and shrinking margin revenue. “Extreme negativity in May could impact retail volumes for some time to come.”

Penson works with small broker-dealers, but the news was just as gloomy at the powerhouses. Morgan Stanley Smith Barney LLC said Wednesday that the May 6 “flash crash” has so frightened retail investors that it’s deferred its goal of raising its profit margin to 15% by the end of this year. It eked out a 7% margin last quarter.

Penson recorded a net loss of $7.4 million in the second quarter, equivalent to a loss of 29 cents per share. The company, which last month purchased the Ridge Clearing and Outsourcing Solutions Inc. business, had a gain of $6.1 million in the second quarter of 2009.

Penson said it moved more aggressively than originally planned to reduce overhead “in line with the current low-interest-rate environment and market activity.” The cuts are expected to result in annual savings of about $2 million, starting in this year’s second half, and will “push annual savings from the [outsourcing] agreement to the high end of the previously announced $7-10 million range,” it stated.

The company, which has an intimate knowledge of its client firms’ balance sheets and revenue, terminated 30 client relationships last quarter — largely because of their sluggishness. “A relationship that pays $2,000 or $3,000 a month and isn’t growing … is hard to justify,” Mr. Pendergraft said. “In a different environment, we might have made different decisions. But we are very focused on costs right now and are trying to ensure that on every correspondent, we have a positive margin.”

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