|
 While the equities business is generally in better shape than fixed
income, where banks such as Barclays and UBS have focused the bulk
of staff cuts, industry consultants and bankers say there is still
not enough volume growth yet to avoid brokers either cutting back or
dropping out.
"The equities industry is in a state of overcapacity," said Frederic
Ponzo, managing partner at consultancy Greyspark Partners. "There
are only two outcomes, really: Either volumes keep rising,
eventually allowing everyone to have their fill, or we will see more
banks drop out of the business."
Volatility, usually seen as good for the brokerage industry which
charges a fee on every trade, has admittedly picked up in the last
month with expectations of a U.S. interest rate increase, a drop in
oil prices and a worse outlook for global growth contributing to
market swings. Volumes have also risen.
But making money from equities trading has also become harder:
post-crisis rules have curbed banks' lucrative but risky market
bets, electronic trading platforms have become increasingly
commoditized and competition has compressed fees so much the
industry is seen as being in a state of oversupply.
And regulators are now proposing more oversight of opaque areas of
the market such as dark-pool trading - where investors can trade
anonymously in a private venue often operated by banks - and in some
cases threatening to unpick the lucrative business model behind
analyst research.
"In the last three months we have seen a pick-up in geopolitical
events and corporate activity...Volumes have picked up a little bit
but they have picked up from a low base," said Patrick George,
HSBC's global head of equities, adding that industry trading
revenues would likely stay flat into 2015.
"The industry will keep downsizing until it finds the right
profitability."
VOLUME PICK-UP
Pan-European monthly equity volumes averaged 1.6 trillion euros (2.0
trillion US dollars) between January and August, according to
Thomson Reuters data, a slight increase compared with the same
period in 2013 but still a long way from the 2.5-trillion-plus
levels seen before the 2007 financial meltdown.
During the same period, average monthly U.S. equity volumes also
picked up a bit, while Asia-Pacific turnover fell slightly, also
according to Thomson Reuters data.
Few expect a return to pre-crisis activity anytime soon. New curbs
on banks' risk-taking and staff compensation have squeezed out big
proprietary bets; there is also less investor appetite for
complexity and risk in a world where index trackers and
exchange-traded funds have been able to outperform hedge funds.
"It is a tough time for trading. International investors in Europe
have become slightly more choosy on what they are going to invest
in," said Neal Hallett, head of EMEA cash trading at Barclays.
[to top of second column] |
Growth on average has been rather tame: Figures for the top 10
largest investment banks including UBS, Morgan Stanley and Citigroup
- as tracked by research firm Coalition - showed a 4-percent drop in
equities revenue for the first half of 2014 compared with the same
period in 2013.
This division has however performed better than bonds, currencies
and commodities trading - where first-half revenues fell 13 percent
- and has over the past decade already made significant strides into
electronic trading.
JPMorgan's third-quarter results on Tuesday posted a 1-percent drop
in equity-markets revenue compared with the same period a year ago.
Citi, meanwhile, reported a 14-percent rise in equity-markets
revenue.
Coalition's first-half data pointed to an estimated annual drop in
2014 industry revenue to $40.3 billion, from $41.4 billion in 2013.
BIGGER IS BETTER
To be sure, there are optimists who are eyeing market-share gains
even in a flat or shrinking market.
They believe that smaller players will eventually drop out of the
business, following in the footsteps of Royal Bank of Scotland and
Credit Agricole's sale of its brokerage brands, allowing the biggest
players to mop up market share without the kind of painful
restructuring seen in bonds.
"The bigger players have got quite a good opportunity," said Mark
Ward, head of execution trading at Sanlam Securities. "(They) have
got the balance sheets to ride it out and pick up the business when
the smaller firms drop out."
Front-office staff in equities desks had already fallen to 17,400 at
the top 10 banks at end-June 2014, according to Coalition figures,
down from 20,100 at end-June in 2010.
This was less drastic than in fixed income, where staff fell to
17,700 from 23,900 between end-June 2010 and end-June 2014.
"There is still cause for optimism in the equities business," said
Paul Johny, a director at Coalition, citing resilient performance in
non-trading businesses such as prime-broking services for investment
funds.
"That said, there has been disappointment over 2014 and it is by no
means certain that the business has bottomed out."
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
