Credit Suisse exits U.S. retail market-making business

[February 04, 2015]  By John McCrank

NEW YORK (Reuters) - Credit Suisse Group is getting out of the U.S. equity retail market-making business by the end of the first quarter after failing to gain enough scale to justify continuing, the bank confirmed on Tuesday.

The decision was part of Credit Suisse's ongoing review of its investment banking business and does not affect the rest of its retail execution services operations, the Swiss bank said in a statement. Credit Suisse also runs Crossfinder, the largest U.S. non-exchange stock-trading platform, or "dark pool."

"Credit Suisse is constantly assessing how to best create efficiencies for our franchise and our clients. We remain committed to continuing to provide our clients with a top-tier offering," the bank said.

Retail market makers facilitate trading by using their own capital to buy stock orders from retail brokerages while attempting to profit off of the spread between the bid and offer prices, often earning just pennies at a time, making scale important. Market makers usually pay to access retail orders because executing those orders tends to be more profitable than making markets for professional traders. But if the price of a stock moves in the wrong direction before the market maker can offload it, the profits evaporate.

The payments can be lucrative for retail brokers. TD Ameritrade Holding Corp made $304 million off of them last year.

Regulators have been probing whether retail brokers have been sending their clients' orders to the market makers willing to pay them the most money, rather than those that will give the best price to the end client.

A Credit Suisse spokeswoman said scrutiny around payment for order flow did not influence the bank's decision.

Competition in market making is fierce. Credit Suisse entered the business in 2011, but never broke into the ranks of the top market-making firms, which include KCG Holdings Inc, Citadel Securities, UBS Group AG, Citigroup Inc, Susquehanna International Group, and Two Sigma Securities.

The five employees in Credit Suisse's retail market-making division will be redeployed, while the bank's agency-led unit will act as a middleman for clients, taking their orders and sending them to firms that do make markets.

Although big retail brokerages such as TD Ameritrade, Charles Schwab Corp, and E*Trade Financial Corp did not use Credit Suisse's market-making services in the fourth quarter of 2014, several smaller firms did send the bank a significant portion of their retail orders, according to regulatory filings.

(Reporting by John McCrank; Editing by Diane Craft and Lisa Shumaker)

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