Banks pile into equities trading as salve for bond wounds

Wed Apr 20, 2016 4:14pm EDT
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By Olivia Oran

(Reuters) - Wall Street banks are piling into equities trading and doing increasingly creative things to win over clients. But as competition heats up, the low-margin business may come under further pressure.

The list of banks focused on growing equities spans both sides of the Atlantic, including Citigroup Inc, UBS Group AG and Deutsche Bank AG.

They are taking different tacks, with some focused purely on old-fashioned buying and selling of stocks, others on derivatives or exchange-traded funds, and others on prime brokerage or electronic trading. Some aim to do all things for all clients.

As newcomers try to gain ground, leading firms like Goldman Sachs Group Inc and Morgan Stanley are fighting to maintain market share. The business already has razor-thin margins, and rivals are trying to nab clients with aggressive prices or new products, traders and analysts said.

"If everyone tries to grow equities, the economics aren't going to be that great," said Guy Moszkowski, a bank analyst with Autonomous Research. "It's also not going to be easy."

The industry has set its sights on the business because it is a safe harbor under new capital rules and because client demand is fairly strong.

However, launching and growing this kind of business requires big up-front investments that can take years to recoup. It is impossible to tell whether banks are building equities trading profitably because they only report revenue from the business, not earnings.

A veteran Wall Street executive said it would take a small player at least five years to reach No. 5 or 6 in market share. The person, who was not authorized to speak publicly, said it takes that long to recruit talent, build trading technology and attract investors with smart research and useful products.   Continued...

Traders wait for the opening of Whiting Petroleum's stock at the post where it's traded on the floor of the New York Stock Exchange March 24, 2015. REUTERS/Brendan McDermid