In Europe, as elsewhere, 2000 was a truly spectacular year for equity trading. In France, Germany, Italy, and the United Kingdom, the industry as a whole made profits of €6.6 billion ($6.02 billion).¹ But 2001 was an equally spectacular bust—industry profits in the four countries fell by more than half (Exhibit 1). And the industry’s roller-coaster ride isn’t over. A new study conducted by McKinsey and J. P. Morgan shows that equity-trading volumes could grow by 8 to 17 percent a year from 2001 to 2005 but that revenues and profits may be more elusive unless wholesale equity brokers adapt their businesses to the changing requirements of their diverse customer segments.²

A rising market and new listings alone will increase overall market turnover by 8 percent annually through 2005.³ Will it grow faster? That depends on trading velocity: the rate at which investors churn their portfolios.⁴ During the second half of the 1990s, it increased steadily thanks to new trading and order-handling technologies, falling transaction costs, and volatile share prices in a growing market. In 2001, it fortunately stayed flat—if it had dropped as far as market capital did, trading volumes would have fallen much...