* 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 (Reuters) - 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 becoming thin.”
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 shock scenario.” (Reporting by Lionel Laurent; Additional reporting by Jamie McGeever; Editing by Peter Graff)