There are some who believe that the rise of new, low-cost electronic securities trading should have killed market making and brokerage—the obscure tasks of executing securities trades for customers and matching buy and sell orders, whether on the floor of the New York Stock Exchange or on some trader’s desk deep inside an investment bank. Indeed, commissions have been slashed and bid-ask spreads have fallen; revenue from trading activities has been volatile. Furthermore, the industry has been tarred by trading scandals that have ranged from price-fixing among NASDAQ market makers to the rogue trader who brought down the 232-year-old Barings Bank.

The conventional wisdom is thus that investment banks and securities firms should abandon securities trading and stick to more attractive activities, such as managing assets and originating securities. Investors have hopped on this bandwagon, penalizing banks that earn substantial trading revenue with low price-to-earnings ratios (Exhibit 1).

But is market making and brokerage really such a bad business? Our analysis shows that, despite the gloom-and-doom prognosis, its economics are healthy. The old business model, which relied on manual, ticket-based trading and on fat commissions and spreads, will no longer work. But market making can still be attractive for...