It may be an economic truism that a rising tide lifts all boats, but a large chunk of the Canadian securities industry is defying that principle.

Over the past couple of years, the securities markets have been through some rather extreme gyrations, plunging sharply in 2008 and recovering just as dramatically in 2009. Following the market’s lead, financial services industry profits have followed a similar arc.

For the securities industry, in particular, the ride has been a bumpy one. The latest data from the In-vestment Industry Asso-ciation of Canada show that overall industry profits jumped by 53% in 2009 to $2.9 billion, vs the 32.3% drop they suffered in 2008.

With the market rebound, many of the industry’s major business lines have bounced back. Investment-banking revenue was up by 27.2% year-over-year, fixed-income trading revenue doubled vs with the previous year, and equities trading revenue swung to $459 million in 2009 from a loss of $11 million in 2008.

However, the retail side hasn’t picked up as smartly. In 2009, commission revenue slipped by 9.7% year-over-year and mutual fund commission revenue was down by 13.7%. (These followed 11.4% and 17.3% declines, respectively, in 2008.) Fee revenue was also down by about 9% in 2009.

The robust recovery in wholesale businesses and the continued erosion in retail mean that various industry segments are feeling the effects of this market environment very differently.

The handful of large, integrated dealers are coming through it best. Although their collective net profit fell by 25% in 2008, to $1.5 billion from slightly more than $2 billion in 2007, their bottom-line earnings ballooned to $2.4 billion in 2009 (an increase of more than 61% year-over-year). These firms saw the same declines in commission and fee revenue as did the rest of the industry, but this was more than offset by the jump in investment-banking and fixed-income trading revenue they enjoyed during the year.

The season hasn’t been as rosy for the rest of the industry. Purely institutional firms did see their earnings rise in 2009, but they were only up by about 16%. They also suffered a much larger drop in profits in the previous year than did the integrated dealers, so the institutional firms have further to come back — the latter’s profits fell by 42% in 2008.

The situation is even uglier for retail shops. They saw their profits completely erased in 2008, swinging to an $8-million loss collectively from a $104-million profit in 2007. In 2009, they clawed back into positive territory, barely, reporting a collective $3 million net profit.

That return to profitability on the retail side came thanks to the full-service segment, which recorded a $31-million net profit in 2009, erasing a $29-million loss in 2008. Still, this is far below the $80 million these firms earned back in 2007.

Meanwhile, the retail introducers continued to see their fortunes deteriorate, as they suffered a net loss of $27 million in 2009 (the only segment to see a loss for the year). Their operating profits were down by almost 74% during the year, following a 36% drop the previous year.

In 2009, the segment’s operating profit was just $57 million, down sharply from $339 million in 2007. It appears that many of these firms are fighting a war of attrition — six retail introducers disappeared during the year (shrinking the number of firms in the category from 88 to 82), while the institutional and full-service retail segments enjoyed net gains.

That said, there is a ray of hope for these firms. Although they saw a net loss for the year, the fourth quarter was their best showing, as they managed a net loss of just $1 million, and both fee and commission revenue rose vs the prior quarter.

Indeed, retail firms saw their commission revenue rise by almost 10% in Q4 2009 vs the prior quarter. Mutual fund commissions revenue was up by almost 16% over the period. And, fee revenue rose by about 12% quarter-over-quarter. IE