Problems Facing the Firm
Quadriserv Firm aimed at creating a centralized marketplace where the investors could effectively lend as well as borrow securities. In other words, the goal of this company was to modernize the United States equity securities lending market. Nonetheless, the brokerage firms resisted Quadriserv Firm’s innovations. Quadriserv faced a dilemma in deciding whether to make the changes to its systems so as to preserve a number of advantages, which the brokerage firms had in the prevailing marketplace and facilitate their participation in the electronic marketplace, which it was creating or not (Cohen & Malloy, 2011). The changes to Quadriserv Firm’s systems would involve restraining access to the broker-dealers who were registered as well as restraining the information, which was made available regarding the trades to the other stakeholders. However, if Quadriserv made these changes, it would undermine its intended centralized marketplace. Besides, the contribution of the established brokerage firms was vital to the anticipated market efficiency. Quadriserv was, thus, experiencing a problem that involved selecting the best course of action to take.
Analysis of Issues
The United States securities lending and borrowing market had been a decentralized market before Quadriserv entered it. In this market, the borrowers used the intermediary brokers to search for the lenders (Cohen & Malloy, 2011). Consequently, Quadriserv saw the need to revolutionize this marketplace through centralizing it. Under the revolutionized marketplace, the investors could lend as well as borrow the securities efficiently. As a matter of fact, Quadriserv aimed at bringing innovation as well as efficiency to the United States securities lending industry. Quadriserv intended to solve some problems of the decentralized market. As highlighted in the case, one of the problems of the decentralized United States securities lending market was the lack of transparency. It is worth noting that Quadriserv Company’s centralized market would raise transparency in the United States equity lending industry and decrease various types of agency problems.
The other problem that the decentralized market had was the dispersion in the fees. According to Cohen & Malloy (2011), there was variation in the rebate rate across lender-broker relationships, time, and stocks. As reported in the case study, Quadriserv Company aimed at eradicating these forms of inconsistencies and result in a more well-organized shorting market through its proposed centralized marketplace. The third problem that Quadriserv intended to solve through its envisioned centralized marketplace was the lack of competition. Under the decentralized market, the borrowers experienced troubles when searching for the prices (Cohen & Malloy, 2011). Besides, the United States equity lending industry was dominated by a small number of key brokers who had the means to block the efforts by the Quadriserv to revolutionize the industry.
Greg DePetris, the founder of the Quadriserv, had some tough choices to make about the company’s future course of action (Cohen & Malloy, 2011). He now realized that the key brokerage firms had a significant control of the United States equity lending marketplace. Consequently, the participation of these firms was vital to the Quadriserv Company’s anticipated market efficiency. Quadriserv would face problems in its pursuit to create a centralized marketplace characterized by the stockholders lending as well as borrowing the securities efficiently. As reported in the case, it would be expensive and difficult to implement an extensive centralized shorting market due to the United States equity lending industry’s unwillingness to support universal marketplace access as well as the credit intermediation from the biggest world’s central counterparty.
Quadriserv Company’s management team needed to make the decision of how to alter their initial plan and oblige the industry’s demand for particular new features concerning the centralized marketplace. These demands included establishing markets in which the brokers could contend openly with each other, eliminating a broker-dealer’s capability to offer sponsored access to its clients, and having a marketplace in which the sole partakers were the registered broker-dealers (Cohen & Malloy, 2011). Quadriserv Company would violate its foundational principles by obliging to these demands. As reported in the case, the future of the Quadriserv Company’s launched AQS was unclear.
Strategic Alternatives and Recommendations for Strategy
DePetris was facing a dilemma of the course of action to take. He had to determine whether to allow the major brokers take part in AQS and, as a consequence, forego the company’s mission or resist the concessions, which the major brokers requested. In my point of view, Quadriserv should not have foregone its mission. Ideally, the company ought to have fulfilled its goal of creating a centralized marketplace devoid of giving in to the concessions that the major brokers demanded. In essence, it should have appealed to the major brokers to take part in the AQS by continuing to grow through the hedge funds. In other words, in an attempt to succeed in creating a centralized marketplace where the investors could effectively lend as well as borrow securities, Quadriserv Company ought to have increased its customer base by continuing to approach the small scale and medium size investors and not give up on its business model. Consequently, this would have forced the major brokers to join the AQS.
References
Cohen, L., & Malloy, C. J. (2011). Quadriserv and the Short Selling Market. Harvard Business School Finance Case, (212-021).
