The Role of Wirehouses in the Economy
A wirehouse is a full-service broker-dealer, originally connected by private lines for shared market info. Though not used now, the term remains to describe these institutions.
Basics
A wirehouse is a full-service broker-dealer that offers a wide range of services to clients, including investment advice, research, underwriting, and trading. They typically work with high-net-worth individuals and institutional investors and vary in size from regional firms to large global institutions.
Wirehouses are regulated by the Securities and Exchange Commission (SEC) and must comply with a variety of rules and regulations designed to protect investors. They are also subject to oversight by self-regulatory organizations such as the Financial Industry Regulatory Authority (FINRA).
The Term Wirehouse
Brokerage firms began using private wires to connect branches, which allowed for quick access to market information and gave rise to the term "wirehouse.” This helped brokers share timely stock quotes with clients. Although originally for broker-dealers, the term also applied to banks and insurers using wired networks. Nowadays, even with wireless communication, big brokerages are still called wirehouses due to their historical reliance on wired setups.
During the 2008 Financial Crisis
The 2008 global financial crisis created significant upheaval for wirehouses due to their heavy involvement with mortgage-backed securities (MBS). Poor oversight of these securities and mortgage brokers played a role in the crisis. Several smaller brokerages shuttered, while major firms like Merrill Lynch and Bear Stearns were acquired or faced insolvency, such as Lehman Brothers. Following the crisis, the landscape was dominated by strong broker-dealers.
Nowadays
Wirehouses, such as Bank of America Merrill Lynch, Wells Fargo, and Morgan Stanley, offer a wide range of services including investment banking, research, trading, and wealth management, with diverse capital market activities that still yield substantial profits despite online quotes and discount brokerages reducing their information advantage.
Wirehouses' Technologies
The internet and cloud computing have completely replaced the older technology utilized by wirehouses. The term "wirehouse" for a full-service broker-dealer is now nearly obsolete, mostly replaced by terms like broker-dealer, brokerage, or investment bank.
High-Frequency Trading Firms
The biggest and most advanced hedge funds are directly linked to major financial exchanges through fiber optic connections. Many High-Frequency Trading (HFT) firms use these connections for a nanosecond edge over rivals and to meet the needs of their rapid algorithms.
Conclusion
The term "wirehouse" refers to large broker-dealers and securities firms from the past, when they used dedicated telegraph and telephone lines for transactions and market monitoring. Today, these firms are better known as full-service broker-dealers or securities firms, using the internet and cloud computing for transactions. High-Frequency Trading firms, in particular, position their data centers close to exchanges to potentially gain a nanosecond advantage.