[ U P D AT E ]
brokerage industry will top $30 billion, or
8% compound annual growth between 2015
and the end of 2020.
Many of the largest investment banks
have praised their respective prime
brokerage businesses for driving total
revenues within their equities divisions.
Morgan Stanley, for example, recently
described its prime brokerage unit as “the
centre of the machine” within its equity
trading division.
However, the Aite Group study showed
that prime brokers are facing rising pressure
from hedge fund clients to step-up in a
number of key areas, including quality of
service, pricing, margin terms, and stock
borrowing.
When asked about their most important
factor when appointing a custodian, 54%
of respondents cited quality of service, up
from 36.2% a year ago. Similarly, 40.1%
said margin terms was among their most
important factors to prime broker selection,
up from 20%.
The survey findings are based on data
collected by Global Custodian’s annual Prime
Brokerage surveys.
“Compared to previous years, however,
the figures are way off from the levels of
excellence and gold stars that were once
common ground for the industry,” said Matt
Simon, senior analyst for Aite Group and
author of the report.
“Hedge fund voice-of-the-customer
Prime brokerage
revenues to
top $30 billion
in 2020 as new
report shows
how banks can
capitalise
Global Custodian data analysed by
Aite Group predicts prime brokerage
revenues to soar in 2020, as banks
face up to challenges in their service
provision and business models.
P
rime brokers are expected to reap over
$30 billion in revenues from their hedge
fund clients, according to new estimates, in
spite of new business model challenges.
New research from Aite Group – in
partnership with Global Custodian – has
estimated total revenues for the prime
Prime Brokerage Global Revenue
2010
$12.5 billion
2015
$22 billion
$30 billion
2005
$9.5 billion
Prime
Brokerage
Global
Revenue
12
Global Custodian
frustrations are also to be expected. Just
as managers are critical of their prime
broker relationships, many of them are
underperforming for investors and may be
in the middle of having to evaluate business
models for their own survival.”
Despite the lucrative earnings from prime
services, many of the major banks are facing
a series of challenges that are impacting
their business models. Many banks are
facing higher costs across financing,
investment technology, and operations. At
the same time, hedge fund closures have
outpaced new launches at a rate of almost
two-to-one.
Most recently, mini-prime broker
GPP announced it would shut down its
prime services business after 10 years of
attempting to capture smaller-sized clients.
GPP said contracting profit margins and
increasing capital requirements made the
business untenable.
The Aite Group study suggested banks
will have to derive additional revenue either
from their existing client base or through
new relationships that are often much
smaller or less mature in their business
dealings.
Many of the largest prime brokers
have conducted reorganisations in order
to closer align the division with their
electronic trading businesses. Last year,
Citi combined its equities, prime brokerage
and securities services division into a newly
named “Equities and Securities Services”
unit, as it looked to capture the increasing
electronification among hedge funds.
Prime brokerage has now become tied
to electronic execution and considered a
pathway to other products within the
equities franchise such as research,
equity derivatives, and synthetic
financing.
The study also forecast
outsourced trading services as the
next venture for prime brokers
to win over new smaller and
medium-sized clients.
“Price and outsourced
functions have become more
than just gospel. Newly
launched funds and smaller
hedge funds especially are
finding appeal in offerings
that are turn-key and priced
extremely competitively,”
Simon added.
30th anniversary 2019
by the end of 2020