While the world’s big financial groups have been undergoing a brutal reorganisation, there have been lower-key but no less painful changes among smaller players.

Britain’s small and mid-cap brokers have been hit particularly hard by the decline of AIM, the junior market of the London Stock Exchange, on which trading volumes and admissions have plunged in the downturn of the past year. The collapse of the Icelandic financial system wrought further havoc in the sector, as did mergers and acquisitions among the investment banks. Commentators expect a fight for survival among boutique brokers.

LSE figures show that the number of companies listed on AIM – one of the small brokers’ prime hunting grounds – had fallen from 1,694 in 2007 to 1,597 by October this year.

Admissions to the market dropped from 284 to 99 and the capital raised on the junior market plunged from £16 billion to slightly more than £4 billion.

At the same time, the quantity and value of the AIM shares traded dropped, as investors shied away from a market regarded as especially vulnerable to a recession. Just over £46 billion of shares were traded on AIM to October, down from £75 billion last year. Mid-size brokers were similarly affected by a downturn in the main markets since the credit crunch hit.

Jeremy Grime, an Arden Partners analyst, said: “Some companies made the mistake of becoming overreliant on IPOs, which means there are a number of loss-makers at the moment.”

The pain in the sector can be seen in recent results. Daniel Stewart Securities admitted last month that revenues were down to £2.6 million for the six months to the end of September, compared with £5.4 million last year, resulting in a net pretax loss of almost £1 million. Peter Shea, chief executive of the broker, blamed the “unprecedented difficulties” in global financial markets. A few days earlier Arbuthnot Banking Group had reported a severe impact on its business, with its securities unit making a loss in the third quarter. Both companies said that they were cutting costs.

The collapse of Kaupthing and Landsbanki, the Icelandic banks, caused a further shake-up. Teathers, owned by Landsbanki, was snapped up by Straumur-Budaras, the Icelandic investment bank, last month, but not before losing key teams to Shore Capital and Canaccord. Evolution Group bought the investment management business of Singer & Friedlander, which is based in Britain, and Kaupthing’s capital markets business became Singer Capital Markets after a management buyout.

There are also question marks over the future of Hoare Govett and Dresdner Kleinwort, which had dominated the British mid-cap broking market. Hoare Govett was bought by Royal Bank of Scotland (RBS) as part of its ABN Amro acquisition, but it is not clear how the broker will fare after a review of the bank by Stephen Hester, the new chief executive, especially because he has insisted that he will cut risk at RBS. In September Dresdner was bought by Commerzbank, a German rival, which is not expected to decide until the new year which parts of the business it will keep.

Arden Partners, which is listed on AIM, has been in talks with several buyers this year, but discussions, including the most recent with an unnamed Indian financial services company, have not produced a deal.

Phil Adams, managing director of Altium, the boutique investment bank, said that clients were taking an increased interest in their brokers’ financial strength. “Every client we have pitched to in the last few months wants to know about balance sheet strength and whether you’re going to be around in six months,” he said. “A year ago, the questions would have been about how much capital you’ve raised.”

He said that it was too early to tell whether having a larger parent company was an advantage. “The only question for a broker who is part of a larger group is whether their parent company will either want to or be able to keep a broker through the current part of the cycle – do they have the stomach for an equities business or will they be unable to support the business through tougher times?” he said.

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