LaBranche & Co. Inc.

1875–2000

LaBranche & Co. Inc., a holding company, is one of the oldest and largest specialist firms on the New York Stock Exchange (NYSE). As a specialist, or 'broker's broker,' it enjoys a monopoly on trading the securities of certain firms on the exchange. In return, it is obligated to act as a barrier in a rising market or a support in a falling market, using its own capital when necessary to minimize an actual or reasonably anticipated short-term imbalance between supply and demand in such securities. Formerly a private partnership, LaBranche became, in 1999, the first specialist firm to turn itself into a publicly owned corporation. It ranked first in trading volume and second in listings among Big Board specialist firms in July 2000.

LaBranche & Co.: 1924--98

George Michel Lucien LaBranche was born in New York City in 1875 and went to work for a stockbroker in 1897. He became a member of the New York Curb Market (which later became the American Stock Exchange) in 1912 and purchased a seat on the New York Stock Exchange in 1917. Along with a son (also George M.L. LaBranche), who also bought a seat on the exchange, in 1923, he founded LaBranche & Co. LLC, a partnership, in 1924. The firm was a specialist in trading the securities of three listed companies at the time. It became a specialist in the stock of the American Telephone & Telegraph Co., one of the most heavily traded securities, in 1929.

LaBranche & Co. survived the Wall Street crash of 1929, although the New York Times Index for 1933 records that a George M.L. LaBranche was suspended from the New York Stock Exchange in October for two years on a charge of violating rules governing stock specialists. The elder LaBranche retired in 1946 and was succeeded as senior partner of the firm by his son. In 1973 LaBranche & Co. was a specialist for the stock issues of 28 companies, including AT & T, Atlantic Richfield Co., McDonnell Douglas Corp., and E.F. Hutton & Co.

LaBranche's revenue grew considerably during the bull market of the late 1990s, from $37.17 million in 1995 to $201.04 million in 1999.

1933–1999

As a private partnership and 'broker's broker' (as opposed to a retail broker), LaBranche pursued its presumably profitable business outside of the public gaze. Like other firms in the field, it no longer faced any internal competition; in 1933 there were 466 stocks traded by more than one specialist, but by 1968 there were none at all. But the role of the specialist, according to some observers, was no longer necessary because floor traders frequently made transactions without their help, and outsiders such as mutual and pension funds, insurance companies, and bank trust departments were taking an increased share of their business to regional exchanges and over-the-counter dealers.

The sharp stock market decline of 1970 resulted in increased, although short-lived, scrutiny of specialist firms, which had three sources of revenue: broker's commissions, trading profits, and capital gains from long-term investment accounts (as distinct from trading accounts). A Securities and Exchange Commission (SEC) study that considered only the first two revenue sources estimated the gross return on capital for specialists at between 84 and 192 percent a year. These figures did not, however, take operating costs into consideration. In any case, the SEC left the New York Stock Exchange to deal with complaints against specialists; these grievances fell into two categories&mdash′actical matters of sufficient liquidity and ethical questions involving conflict of interest. Although the Big Board's governors rarely took a stock away from a specialist, they sometimes refrained from awarding lucrative, actively traded new stocks to specialists whose performance in handling market fluctuations had been deemed unsatisfactory.

Going Public in 1999

By 1999 the volume of stock trading, both within and outside the New York Stock Exchange, had grown so great that numerous specialists had merged in order to pool the necessary capital needed to stay in business. There were only 29 specialist units left on the exchange at midyear, compared with 39 at the end of 1994. LaBranche & Co. ranked third, handling about 280 stocks listed on the Big Board, but it was first in dollar volume traded on the exchange. Among the stocks for which it was acting as specialist were 47 of Standard & Poor's 500 and five of the 30 comprising the Dow Jones Industrial Average--AT & T, Chevron Corp., Exxon Corp., Merck & Co., and Minnesota Mining & Manufacturing Co. In 1999 the stocks for which LaBranche acted as specialist accounted for 14.5 percent of the dollar volume of common stock traded on the exchange. In addition, with about 50 foreign listed companies, LaBranche was trading more American Depositary Receipts than any other specialist. Some 73 seats on the NYSE were controlled, financed, or leased by LaBranche.

1995–1999

LaBranche's revenue grew considerably during the bull market of the late 1990s, from $37.17 million in 1995 to $201.04 million in 1999. Its net income increased even more dramatically, from $1.13 million in 1995 to $29.03 million in 1999. The firm, which had been in fifth place among NYSE specialists at the end of 1995, handling 125 stocks, solidified its position in 1997 by acquiring a portion of the specialist operations of Stern Bros., LLC and the specialist Ernst, Homans, Ware & Keelips. In 1998 it added another specialist firm, Fowler, Roenau & Geary, LLC. These acquisitions added 131 new common stock listings. To acquire still more firms and to buy out, for $90 million, the 14.2 percent stake in LaBranche held by the Dutch specialist firm Van der Moolen Holding NV, the firm elected in 1999 to become the first New York Stock Exchange specialist to go public. This decision was not well received by LaBranche's rivals. 'You've got this parochial industry that's used to holding its cards close to the vest,' a source said to be well acquainted with the firm told Marcia Vickers of Business Week. 'LaBranche has upset the gentleman's club.'

When LaBranche & Co. issued its prospectus, the public learned how lucrative specialist operations could be. In 1998 the firm--including its recent acquisitions--had a pretax profit margin of 45 percent, compared with, for example, 25 percent for the financial services firm of Goldman Sachs & Co. and 12 percent for Merrill Lynch & Co., the world's largest brokerage. In 1998 LaBranche's 36 managing directors received $60.2 million in compensation--an average of $1.7 million each. George M.L. (Michael) LaBranche IV and the other 35 managing directors collectively owned about 70 percent of the firm. LaBranche, president, chairman, and chief executive officer, was also a governor of the New York Stock Exchange.

In transforming LaBranche from a partnership, the firm established LaBranche & Co. Inc. as a holding corporation with two subsidiaries. LaBranche & Co. became a limited partnership, with LaB Investing Co. L.L.C as the general partner of LaBranche & Co. The members of the latter agreed to exchange their interests in this partnership for 34.8 million shares of the holding corporation's common stock and $9 million in cash. The offering barred them from selling their stock for between three and five years. In August 1999 LaBranche sold another 10.5 million shares to the public at $14 a share. The price fell short of the $15 to $17 anticipated, however, and a million shares offered went unsold.

The cool response to LaBranche's offering was motivated in part by fears that its revenues and profits would slide sharply once the bull market came to an end. In 1999 the firm received 75.1 percent of its revenue from trading in specialist stocks and 18.5 percent from commissions. Unlike many other brokerage businesses, it was not engaged in investment banking, bond trading, or money management. 'By having to support an orderly market, maintain inventory positions and refrain from trading under some favorable conditions,' the prospectus noted, 'we are subjected to a high degree of risk.' The new holding company structure allowed LaBranche to incur $115.82 million in long-term debt as of the end of 1999, with interest on this sum to be paid each year.

1861–2000

Foreseeing a More Competitive Future

Some observers believed that LaBranche and other specialist firms would become obsolete as investors turned to alternative trading systems. A number of electronic trading networks, such as Instinet and Island, had become serious competitors to the New York Stock Exchange itself as well as the Nasdaq market and regional exchanges. 'The changes in financial services are coming faster than everybody anticipated,' an investment analyst told Terzah Ewing of the Wall Street Journal during the summer of 1999. 'Traditional investment banks, commercial banks and even exchanges have to adapt and adapt quickly because technology is reshaping the competitive landscape.'

LaBranche & Co. was reported in early 2000 to be planning to expand its scope by beginning to trade in Nasdaq stocks before the end of the year and forming alliances with electronic communications networks. It also was said to be planning to increase its presence after trading hours on the Big Board and to be developing an e-platform to trade foreign stocks in the hours before markets opened in the United States. The company would then no longer be a New York Stock Exchange specialist but, according to Michael LaBranche, a 'trading corporation' and 'a market maker in different markets.'

In March 2000, LaBranche & Co. acquired Henderson Brothers Holdings, Inc., owner of Henderson Brothers, Inc., a New York Stock Exchange specialist firm, for about $230 million in cash. This purchase included the company's clearing operations. Founded in 1861, Henderson Brothers became a NYSE specialist in 1948 and was the eighth largest at the end of 1999, with 113 listings. Its revenues came to $82.1 million that year. Also in March 2000, LaBranche acquired Webco Securities, Inc., another NYSE specialist firm, for 2.8 million shares of common stock, $10.9 million in cash, and $3 million in senior promissory notes. Founded in 1981, Webco had $13.7 million in revenue in 1999 and 34 stock listings at the end of the year. The acquisitions of Henderson Brothers and Webco Securities made LaBranche the specialist for 413 common stock listings, including 75 of the S & P 500 and seven of the 30 companies included in the Dow Jones Industrial Average. One year after the initial public offering, LaBranche's stock was trading at more than double the original price.