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Running an investment bank these days is a bit like spinning plates. No sooner have you got one of them whizzing round nicely than another threatens to crash to the ground.
In the last few years it has been fixed income trading that has needed the most attention, knocked off course by tougher capital rules and reduced customer flows. Thanks to rising US rates and the Trump bump, trading in bonds and foreign exchange is at last looking more stable.
Now it is equities that is wobbling badly. Lower volumes, falling commissions and mounting technology costs have put the business under intense pressure just as regulatory change is threatening a slump in revenue from research. It is time for banks to consider radical action.
For years there has been excess capacity in equities. Insiders say that only the very biggest banks make decent returns and the gap between the leaders and the rest is widening. The global top three, Morgan Stanley, JP Morgan and Goldman Sachs, together with UBS in Europe and Asia, have been increasing their market share while banks that are strong in other areas, such as Citi and Barclays, have struggled to keep up.
Lower down the league, some have thrown in the towel. Last year Nomura pulled out of research and underwriting in London, while retaining its electronic agency broker Instinet. Few have been anything like as bold.
And now the game is getting tougher still.
Revenue from equities trading tumbled 13% at the top dozen global investment banks in 2016 according to Coalition, the research firm. And a partial recovery in the last quarter has proved short-lived. Barclays analysts say that global equity trading volumes in January and February were down 14% on last year and equity derivatives were 22% lower.
So what can the banks do?
One option is to pull back in the most difficult parts of the business, such as derivatives. But George Kuznetsov, head of research at Coalition, says it is unlikely big banks will significantly reduce or exit large blocks of equities products partly because the cost savings would be relatively modest. “They will also be concerned about the material negative impact on revenue in other products across the broader equities platform.”
The conventional wisdom is that clients want banks to offer a full service across all equities products and retreating in one area would threaten the wider business. Similar warnings were issued when banks such as UBS pulled back from some fixed income products yet the rest of the business has proved more resilient than many predicted. But equities folk insist that their business really is indivisible. They also point out that a strong equities trading platform is essential to get equity capital markets work which can be much more profitable (and has picked up sharply this year after a dismal 2016).
While there have been cutbacks, particularly in Asia, some of the banks outside the top tier, such as Deutsche Bank and Credit Suisse, are talking about selective investments in their equities arms. The common strategy seems to be a desperate race to the top that only a few can win.
At the same time all the banks are facing a new challenge from the European reforms to payment for research. Designed to separate payment for research from trading commissions, the EU rules that come into force in January next year will require fund managers to pay for research themselves or to pass on the cost to clients in separate accounts. Likely to be adopted by the big banks globally, the changes are expected to result in a sharp fall in the amount asset managers pay for bank research which currently represents about half of commissions.
The assumption is that many banks will make big cuts in their research operations and asset managers will hire more analysts themselves. Some asset managers say this would be bad for their clients. Mark Burgess, head of equities at Columbia Threadneedle, says it would ultimately cost clients more if scores of managers built their own teams of analysts than if they shared the resources of a few big banks.
The head of another asset manager says his firm has considered setting up joint research operations with other managers. But there is a better solution: banks should cut costs by setting up equities joint ventures with their rivals.
There are some successful precedents, such as Exane BNP Paribas and Kepler Cheuvreux, which has partnerships with UniCredit and Crédit Agricole.
Insiders believe some of the top banks might consider similar partnerships with boutiques or fintech companies.
But what about a joint venture between two big banks? Is it really unthinkable to have a partnership in equities trading and research between, say, Deutsche Bank and Credit Suisse?
True, it would be logistically and culturally much more difficult. But it might be the best way to keep all the plates spinning.