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 Phil Drury and Doug Adams, then co-heads of U.S. equity capital
markets focused on block trading, a corner of the trading business
where razor-thin margins can quickly turn to big losses when markets
sour, according to people close to the matter.
Citi plunged in the rankings for that part of the market during the
third quarter to number eight, according to data provider Ipreo. The
previously unreported numbers mark a big drop for a bank that has
topped the list for U.S. block trading in seven of the last 11
quarters.
Citigroup's <C.N> decision may have been prescient. The Standard &
Poor's 500 index <.SPX> dropped 7 percent during the quarter, and
the market's lurches and twists were often terrifying for investors.
Between August 15 and August 25, The S&P fell 11 percent.
Such declines can prove costly for block trading businesses, where
banks buy millions of shares from a company or an investor at just
below the market price, and then try to quickly sell the shares to
others at somewhere closer to their current market value. Block
trades can bring in a million dollars or so in quick profits, but if
the market suddenly turns the wrong way a bank can lose a good $20
million.
"People lose far more than they may be admitting to," said Jonathan
Cunningham, co-founder of capital markets advisory firm Aequitas
Advisors and a former Jefferies Group head of convertible bond
underwriting.
Citigroup's decision to scale back block trades in the third quarter
was not influenced by any trading losses, people familiar with the
matter said. Instead, the bank saw potential downside in a business
that has helped boost revenue across Wall Street in equities trading
and underwriting all year.
Yet some rivals were more willing to try to navigate the tempestuous
markets during the quarter, underscoring the tough balancing act
bank executives face in weighing market risks against their
strategic business goals.
Goldman Sachs Group Inc <GS.N> topped last quarter's league table
for block trades with a 25.6 percent market share of total proceeds,
followed by Morgan Stanley <MS.N> and Credit Suisse AG <CSGN.VX>
Representatives for the banks declined to comment.
Total proceeds for block trades across all banks held up relatively
well during the volatile third quarter, topping $10.3 billion, down
just 4 percent from the same period last year.
One reason that not all banks followed Citi in dialing down risk in
that quarter could be that block trades help land other business,
such as underwriting or merger advisory and also generate more stock
trading volume.
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"You want to be in the flow, even if you happen to lose." said
Daniel Klausner, who leads the capital market advisory practice at
PricewaterhouseCoopers. "If you start losing every single block bid,
people stop calling you."
A spokesman from Citi declined to comment on the bank’s strategy.
Citigroup and other major U.S. banks, such as Bank of America Corp,
and JPMorgan Chase & Co, will probably confess to at least some
difficulty in stock and bond trading over the coming days as they
post third quarter earnings. Bond trading is likely to suffer the
most because of heightened uncertainty when the Federal Reserve
might start raising rates has depressed volumes.
For Citigroup, the decision to reduce risk in the third quarter
comes at an inopportune time: the bank is trying to build up its
stock trading business after years of neglect, through courting
hedge funds more aggressively, overhauling its trading technology
and hiring key executives, sources told Reuters in August.
As part of those efforts, Drury has moved to London to head up
capital markets for Europe, Middle East, and Africa.
Sources familiar with Citigroup said it expected to continue to be
aggressive in block trading when the market improves. Even with its
pullback in the third quarter, Citi ranks third for U.S. block
trades so far this year by volume, behind Credit Suisse and Barclays
PLC, Ipreo data show. The ranks first by number of deals.
(Reporting by Olivia Oran in New York, additional reporting by
Lauren Hirsch, Editing by Dan Wilchins and Tomasz Janowski)
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