What Is a Wirehouse?
A wirehouse is a term used to describe a full-service broker-dealer. Modern-day wirehouses vary from small regional brokerages to large institutions with global footprints.
Key Takeaways
- A wirehouse is a full-service broker-dealer of any size.
- The term “wirehouse” originates from the time when broker-dealer offices were connected by private telephone or telegraph lines. This setup enabled branches to access the same market information simultaneously.
- Although daily operations have moved beyond physical wires, the term still describes these institutions today.
From Wires to Widespread Influence
The term “wirehouse” was coined during a period when brokerage firms were primarily connected to their branches via private telephone and telegraph wires. This network allowed branches easy access to the same market information as the head office. As a result, brokers could provide up-to-date stock quotes and market news to clients.
Though historically used to describe broker-dealers, the term also referred to banks and insurance companies connected to their headquarters through these wired networks. Today, the internet facilitates wireless communication and data transmission, yet many large brokerages are still known as wirehouses due to the significant impact early wire communications had on their operations.
How the 2008 Financial Crisis Shook Wirehouses
The global financial crisis of 2008 brought unprecedented turmoil to wirehouses due to their exposure to mortgage-backed securities (MBS). The lack of regulation around mortgage-backed securities and mortgage brokers contributed to the crisis. Many smaller brokerages had to shut down, and several big names like Merrill Lynch and Bear Stearns were either acquired by banks or became insolvent, like Lehman Brothers. Post-2008, the landscape was mainly populated by powerhouse broker-dealers.
Today’s Wirehouses: Still Standing Strong
Most present-day wirehouses are full-service brokerages that offer a broad range of services, including investment banking, research, trading, and wealth management. Although the rise of discount brokerages and online quotes has eroded their market information edge, their diverse activities in capital markets ensure they remain highly profitable. Notable examples include Bank of America Merrill Lynch, Wells Fargo, and Morgan Stanley.
Wirehouses in a Modern Technological Landscape
Do wire houses still use dedicated telephone and telegraph lines?
No, modern technology has replaced dated telephone and telegraph lines. The internet and cloud computing have rendered old technologies obsolete. Contemporary terminology describes such entities as broker-dealers, brokerages, or investment banks.
Who are the leading wirehouses today?
Globally, leading banks are often registered as broker-dealers to execute securities transactions across various jurisdictions. In the U.S., notable wirehouses include Bank of America/Merrill Lynch, Goldman Sachs, Wells Fargo, and JP Morgan Chase.
Do some hedge funds have direct links to major financial exchanges?
Yes, the largest and most sophisticated hedge funds maintain direct fiber-optic connections to major financial exchanges. High Frequency Trading outfits, in particular, rely on these connections to gain a nano-second advantage and meet the demands of their high-frequency algorithms.
The Bottom Line
“Wirehouse” is an older term used to describe large broker-dealers and securities houses. Although initially referring to brokerage firms that relied on dedicated telegraph and telephone lines, wirehouses today are full-service broker-dealers or securities houses leveraging the internet and cloud computing. High Frequency Trading firms exemplify the ongoing evolution, establishing data centers close to financial exchanges to gain slight yet vital advantages over competitors.
Related Terms: Broker-Dealer, Investment Banking, Capital Markets, Trading, Wealth Management.
