[ I N- D E P T H | C O V E R S T O R Y ]
Equity trading had a booming start to 2018. Across many of the big Wall Street banks, revenues from their markets business achieved substantial growth, largely driven by improvements in equities sales and trading. JP Morgan posted record equities revenues of $ 2 billion in the first quarter of 2018, while revenues from Citi’ s equities desk skyrocketed 38 % to $ 1.1 billion, its best ever quarter. Meanwhile, Morgan Stanley topped the equities ranks, with its revenues beating analyst expectations by $ 400 million to reach $ 2.6 billion, up 30 % year-on-year. This was followed by Goldman Sachs where equities revenues also jumped by 38 % to $ 2.3 billion. Elsewhere, British bank Barclays now has one of the fastest growing equities franchises, after seeing revenues rebound 43 % to $ 827 million. So, what are their secrets? The answer: winning business from hedge funds. This has become a key battleground for the big banks, in which many have invested significantly into their prime brokerage capabilities. And now, their investments are paying off. According to investment banking research firm, Coalition, revenues for the largest investment banks providing hedge fund services increased 17 % in the first half of 2018. In the short-term, the big banks benefited from a volatile first quarter in the stock market, sparked by the first hints from US President Donald Trump of a trade war, prompting hedge fund investors to trade more and increase their short selling activity. However, the jump in revenues also show the results of a longer-term programme in improving prime brokerage capabilities. Prime brokerage is being increasingly tied to electronic execution, and is often the pathway to other products within the equities franchise such as research, equity derivatives, as well as financing.“ Prime brokerage and financing has been a driving force for the industry’ s equities wallet, and financing continues to be a catalyst in our growth story,” says Betty Gee, head of prime sales, Americas, Barclays.
“ Going forward, the market will continue to look at ways to innovate and continue to offer efficiencies and / or pricing that prime clients can consume.”
JONATHAN COSSEY, GLOBAL CO-HEAD OF PRIME BROKERAGE, JP MORGAN
“ Financing often acts as the bridge between businesses. We have seen the prime brokerage business moving from a one-size-fits-all approach to a more tailored model accommodating more bespoke solutions.” The surge of investment into prime brokerage largely reflects the growth in the hedge fund industry since the financial crisis. Hedge funds have grown every year for the past few years, most recently reaching a record $ 3.2 trillion in assets under management, up by 6.4 % according to Deutsche Bank’ s annual Alternative Investment Survey. Furthermore, in an environment of asset manager consolidation and the growth of passive investing over active investing, traditional long-only managers have been launching hedging strategies that require services from prime brokers, according to Ermanno Dal Pont, global head of strategic consulting at Barclays. Particularly in Europe, some asset managers expanding under the UCITS banner, enabling them to go short. All of this means a wider client base for prime brokers.
Prime on par with cash The prime brokerage business has also greatly evolved since the financial crisis. Prior to 2007, the cash equities business was the leading revenue-earner for the industry, followed by derivatives and then prime brokerage. Fast forward today, cash equities account for around 18 % of industry equities revenues at $ 5 billion, while prime services represents 40 % of revenues at $ 10.7 billion with equity derivatives at 33 %, or $ 8.9 billion, according to Coalition 1H18 investment bank index. According to Paul Galietto, head of equities, Americas at Credit Suisse, the economics of“ cash has changed” as the cost of transacting has fallen, coupled with the transition towards electronic execution. And now, financing is a central element to that electronic piece.“ The equation has resettled in that it is possible for the size of the execution and the financing business to be on par. The clear picture is financing, as opposed to being a distant but rapidly growing piece of the equities puzzle, now sits on par with the cash and execution business,” says Galietto. Many primes are leveraging the business for different parts of their equities franchise. In addition, the transition to electronic execution has encouraged many to focus on synthetic equity financing and
28 Global Custodian The Hedge Fund Annual 2018