NEW YORK Nomura Holdings' decision to scale back its equity trading business halts its ambitious U.S. growth plans and creates a Manhattan real-estate conundrum for Japan's biggest brokerage.
Nomura (8604.T) said Thursday it will move its equities execution business in the Americas, Asia and Europe to its New York-based Instinet arm as part of a broader cost-cutting plan. It will no longer buy and sell stocks using its own capital, but instead match clients' buy and sell trading orders through Instinet.
The shift reflects a broader effort by brokerage firms to reshape equities operations that have been battered by years of low trading volume and falling commissions. Companies ranging from Bank of America (BAC.N) and Goldman Sachs (GS.N) to much smaller firms have been hit, and many have been trimming large, capital-intensive operations.
For Nomura, the change is radical and sudden. Japan's biggest broker, which bought Lehman Brothers' European and Asian operations after the investment bank failed in 2008, has spent the last few years building a U.S. operation that its website promised would be world-class. "We aim to become the world's leading provider of liquidity," one equities employee says on the website.
Nomura's New York staff has almost tripled to about 2,350 from about 900 in 2009, when its equities effort started.
The firm recently signed a 20-year lease to accommodate the growth it expected in New York. It is moving next July from lower Manhattan into 820,000 square feet spread over 16 floors to a Midtown building called Worldwide Plaza. Nomura has already spent $270 million preparing the space for trading and other operations.
As recently as May, a senior Nomura executive in the United States said the new space would allow the firm to increase staffing by another 50 percent.
That's unlikely to occur. Nomura said Thursday the Americas will bear 21 percent of its cost cuts. Personnel cuts will account for about 45 percent of the global savings, Nomura said. Specific decisions about layoffs have not yet been made, according to a spokesman.
The growth plans changed quickly after Nomura's former chief executive resigned in July amid a widening insider trading scandal in Tokyo. His replacement has quickly changed gears.
For more than a year, equities traders and salespeople had expected Instinet to be folded into Nomura's broader securities operation, which includes research from 17 analysts. The Japanese firm bought Instinet in 2007 for about $1.2 billion, and in the past year has cut about 200 employees to cope with shrinking profits as trading volume and commissions fell industrywide.
Now, though, Nomura's business is being folded into Instinet, which itself recently moved into almost 100,000 square feet on three floors in another Midtown building, which it had leased until August 2020.
A Nomura spokesman did not comment on whether Nomura plans to sublet any of the floors in its new buildings.
He also declined to say whether any of Nomura Securities' traders, salespeople and other staffers will move to Instinet. Nomura will continue to offer "non-execution" services such as lending to hedge funds, selling convertible securities and offering futures and options through its equities unit, but the majority of its employees are involved in trade execution.
Ciaran O'Kelly, head of the equities unit in Americas, will cede oversight of execution services to Instinet America chief Jonathan Kellner, according to people familiar with the change.
Instinet executes about 5 percent of equities traded in the United States, and expects its market share to grow after the Nomura integration. However, the overall pie is shrinking.
Average daily stock trading volume in August was 56 percent below its recent peak in March 2009, according to Tabb, and is expected to remain sluggish at least through year's end because of uncertainty over the U.S. election and the Eurozone crisis.
"Agency brokers" such as Instinet, which do not trade with their own capital when buying or selling from clients, generate very thin profit margins that have been squeezed further by three years of declining trading volume and a decade-long plunge in commission costs.
Trading commissions paid by mutual funds, hedge funds and other institutional traders have slipped from about 15 cents a share in the 1970s to less than a penny a share over electronic systems such as Instinet.
Global fees paid by clients for trade executions dropped from $300 billion in 2007 to $220 billion in 2011, according to consulting firm Oliver Wyman.
Clients have also been simplifying operations by trading with fewer banks.