Citi dials down risky block trading amid market turmoil

Tue Oct 13, 2015 1:19am EDT
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By Olivia Oran

NEW YORK (Reuters) - Over the summer, as the U.S. stock market wobbled and then plunged 4 percent in a day, Citigroup made a tough choice: to dial down risk-taking in the bank's capital markets group.

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: Quote) 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.   Continued...

Women walk near a Citibank branch in Hanoi, Vietnam in this July 8, 2015, file photo.  Citigroup Inc is expected to release Q3 earnings October 15, 2015.   REUTERS/Kham/Files GLOBAL BUSINESS WEEK AHEAD PACKAGE - SEARCH 'BUSINESS WEEK AHEAD OCT 12'  FOR ALL 35 IMAGES