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 A lack of investment in equities and a traditional focus on bond
trading kept the No. 3 U.S. bank by assets in the lower echelons of
equities league tables, which measure how much revenue Wall Street
banks earn from their equity trading units.
It will be tough to dislodge leaders such as Goldman Sachs Group,
Morgan Stanley, and JPMorgan Chase & Co, that have long dominated
the business.
But having shored up its business and capital ratios since the
financial crisis, largely by spinning off non-core assets, Citi now
aims to profit from a retreat of rivals that were slow in adapting
to new rules that force banks to keep more capital, two people with
direct knowledge of Citi's plans told Reuters.
Deutsche Bank, Credit Suisse Barclays and others are re-aligning
their investment banking businesses. Prime brokerage units, which
provide loans and other services to hedge funds, are being pared
back in favor of less capital-intensive businesses such as wealth
management.
Citi, meanwhile, plans to court hedge funds more actively as part of
a four-point plan to boost its equities market share, the sources
said.
The strategy includes an overhaul of Citi's trading technology,
hiring key executives, expanding research and boosting the unit's
financing.
The bank recently appointed former Chi-X Global chief John Lowrey to
head its electronic execution unit, and ex-UBS executive Adam
Herrmann to run prime brokerage.
Citi has also hired 11 analysts so far this year to support its
investment advisory business, and is increasing financing of the
unit in general, said the sources, who did not have permission to be
quoted in the media.
COURTING HEDGE FUNDS
Citi has catered to traditional asset managers, but is now shifting
its attention to hedge funds, which tend to trade more actively and
can bring higher returns through fees. Mid-sized firms are
especially attractive, because they lack the resources of their
bigger rivals and Citi can offer them services such as risk systems,
credit monitoring, and trading algorithms, which have all been part
of Citi's technology revamp.
Building up its prime brokerage and bespoke equity derivatives, key
to winning over hedge funds, will be difficult though, because they
are capital intensive businesses, said Guy Moszkowski, an analyst at
Autonomous Research LLP.
"It will be a tough slog for them," he said.
But after years of under investment and cuts in the equities
franchise the bank is ready to strategically invest in the unit and
will do so at a measured pace, the sources said.
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Another way they said Citi is putting its capital to work is by
expanding its institutional market making business, where it buys
and sells large blocks of stocks or derivatives from clients.
As part of its technological push, Citi has rolled out a product in
the United States, with plans to launch in Europe, called "Optimus"
that helps clients select trading algorithms. "Optimus" looks at
different aspects of the clients' orders, such as size, speed, and
market momentum, and then picks the appropriate algorithms to scan
the market for other orders that have those same qualities.
Citi's efforts to boost its equities revenues follow a concerted
push to get its house in order after the 2008-2099 financial crisis,
when soaring losses from bad mortgage debt forced it to take a $45
billion government bailout.
The revamp included the sale of its retail brokerage arm Smith
Barney and other assets that left the bank demonstrably lighter on
equities.
"It's a recurring theme where they under invested and now they have
to reinvest," said Brian Kleinhanzl, an analyst with KBW.
Citi's last big bet on equities was in 2007, when it paid $680
million for retail equities market maker Automated Trading Desk (ATD).
Fierce competition and years of anemic trading volumes following the
financial crisis have hurt ATD business.
Citi still sees the retail order flow ATD as valuable, especially
for institutional clients to trade with, said one of the sources.
Still, the bank is always looking at "strategic alternatives" for
the unit, said the other.
(Reporting by John McCrank and Olivia Oran; Editing by Carmel
Crimmins and Tomasz Janowski)
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