* Q1 trading lower than in 2011 for top banks, despite rally
* Margins flattened by electronic trading, tougher rules
* Sign of healthier market but new risks may arise
By Lionel Laurent
LONDON, May 27 The stock market is booming but
revenue has not picked up at the share trading desks of European
investment banks, kept away from the party by new regulations
and a shift to cheaper electronic trading.
Investment banks' share trading arms are cutting costs by
reducing staff and keeping salaries low, even though volumes are
up and share prices are at an all-time high.
"The stock market is booming and nobody is having any fun,"
said one London-based hedge fund manager, on condition he not be
named while giving a gloomy assessment of business.
The stock market boom is unmistakable: the pan European
FTSEurofirst 300 index is up 22 percent since the end of 2010.
European share turnover in April 2014 of 1.85 trillion euros was
higher than the 1.76 trillion of April 2011.
But total revenue from equities trading for nine global
banks including Credit Suisse, Deutsche Bank
and UBS has been largely flat over the last
four full calendar years, hovering at around $40 billion a year.
The latest quarterly figures tell an even gloomier story:
equities revenue at the nine was $11.3 billion in the first
quarter of 2014, a drop of 19.3 percent from the first quarter
of 2011, according to Mediobanca research. The nine banks
covered by the research did not return calls seeking comment.
Where revenue falls it takes jobs with it. Head count at top
banks' equity desks dropped 9.3 percent between March 2010 and
March 2014, according to research firm Coalition.
Electronic trading systems have helped make it possible for
banks to cut costs. But that means smaller margins as clients
expect lower commissions and cheaper trades.
"Cash equities is a very capital-light,
high-return-on-equity business...(But) revenues have been
squeezed substantially because of the move to electronic
trading," said Chris Wheeler, an analyst at Mediobanca.
"The jury's out on whether revenue will pick up."
Shailesh Raikundlia, analyst at Espirito Santo, said the
equities trading business at investment banks was "in terminal
decline". "Everything is executed electronically. Margins are
Some banks still see opportunity: French bank Societe
Generale is betting on growth in equity derivatives,
while JPMorgan Chase is seeking to gain market share in
cash equities trading.
But overall, few expect their equity arms to enjoy the kind
of growth spurts seen before 2008, especially in Europe.
"Equities in Europe have suffered as an asset class since
the crisis," said Marco Bach, a former equity derivatives trader
who is now Chief Financial Officer at Forte Securities.
He noted that margins and volumes in the trade of
derivatives have fallen even farther than in cash trade.
Supporters of tighter regulations argue that the bad news
for bankers is good news for the financial system - banks are
making less money in part because they are taking fewer risks.
Banks are no longer placing large bets on their own account
thanks to measures adopted in the wake of both the dotcom bubble
of a decade ago and the 2008 economic crisis.
That should be good news for the public exchequers worried
about the potential cost of bailouts.
"It should be an advantage for taxpayers if banks are not
dealing in volatile assets on their balance sheet," said
Professor Martin Hellmich, of the Frankfurt School of Finance.
But some argue that the changes could actually make the
financial system riskier, as banks retreat from their
traditional role as market makers for shares, forcing fund
managers to find other, less stable sources of liquidity.
"Banks are no longer making markets and warehousing
securities to trade as before, and that may expose us to more
volatility in the future," said Yannick Naud, portfolio manager
at Sturgeon Capital.
He argued that much of the trading volume that appears in
statistics is a result of high speed electronic trading tactics,
and masks a shortage in the liquidity that investors depend on
to get the fairest price, which investment banks once provided.
Clients with big orders to buy or sell shares can no longer
assume that their bankers will step up to make the trade.
"Markets are fragmented. Orders have to be broken up," said
Professor Thierry Foucault of Paris-based business school HEC.
"The nature of trading itself is being altered."
Hellmich in Frankfurt said: "It can be a disadvantage in
that there is definitely a (liquidity) gap that is not being
filled by market participants. That can become very serious in a
(Reporting by Lionel Laurent; Additional reporting by Jamie
McGeever; Editing by Peter Graff)