Once high flyers, Lehman traders grounded at Mizuho

TOKYO (Reuters) - When Lehman Brothers collapsed last September, Japan's Mizuho Securities elbowed past bigger rival Nomura Holdings to scoop up one of Lehman's prized assets in Tokyo: its hotshot team of electronic traders.

A year later, that team of whiz-kid traders, cloistered from the rest of the trading floor by a wall of glass, has produced scant revenue, according to three people with direct knowledge of the matter.

Meanwhile, Mizuho's dream of becoming an Asian equities powerhouse gathers dust, held back by caution and a slow-moving corporate culture.

"The firm has hired all the right people to do this and made a small investment in product development, but has yet to commit the budget to let this project go live," said one source.

"There's been no business. This crack team is still sitting there and in the meantime Nomura has been creeping up," the source added.

The Mizuho team is made up of around 20 people and led by Anthony Brooker, former head of Asian electronic trading sales at Lehman. Members are broadly split between electronic trading and prime brokerage services.

Electronic trading is the routing of stock orders across a network, usually on behalf of hedge funds and other institutional investors. The Lehman team placed orders across Asia. Prime broking refers to a suite of services offered by securities firms and banks, usually to hedge funds.

A key Lehman offering was high-frequency trading on the Tokyo Stock Exchange, where it placed thousands of orders per second on behalf of clients, using algorithms and automated trading strategies.

In its heyday, Lehman was responsible for about 7 percent of the volume on the Tokyo exchange, with much of that driven by the team's high-volume trades.

Mizuho, the securities arm of Japan's second-largest bank, Mizuho Financial Group, has so far balked at pursuing the prime brokerage business, the sources said.

The sources spoke on condition of anonymity as they are not authorized to speak publicly.

STRICT ON RULES

Much of the delay is due to a cautious corporate culture that emphasizes planning and documentation, the sources said.

"Compared with Lehman or Morgan Stanley or other foreign banks, Mizuho is much stricter on the rules. But if you are too strict, you lose customers," one said.

"(The team) wants to get this started quickly. They want to be doing electronic trading and prime services, but Mizuho wants to get its rules in place first."

The brokerage is also hampered by technology that is less sophisticated than those of Western banks, the sources said.

Neil Katkov, head of Asia research for financial services consultancy Celent, said the substantial technology required for high-frequency trading could prove a deterrent for Mizuho.

"The bar is always, always being raised and major firms are putting in new technology all the time to keep up," he said. "It's an expensive proposition to compete there."

Katkov estimates that automated trading accounts for just 10 percent of stock market volume in Japan, but expects that to at least double by 2012. In the United States, more than 40 percent of the volume is from automated trades, he noted.

Mizuho Securities spokesman Toshimitsu Okano declined to comment on how much revenue the team has so far generated.

He said Mizuho currently offers algorithmic trading and electronic trading for the Japanese market, adding: "Our plans are to be a major player in the rest of Asia."

Asked when the prime broking services would be ready, Okano said: "Mizuho are in constant dialogue with our clients in order to determine the timing that will best serve them."

Asked if Mizuho were slow to make decisions, he said decision-making differed from company to company.

BAD TRADES

Much of Mizuho's caution comes from its recent history of getting squeezed by bad trades, the sources said.

In 2006, the firm took a group of structured credit traders from French bank Calyon and then went on to rack up massive losses on subprime investments.

Mizuho Financial lost more than $6 billion on the subprime in the year to March 2008, the most among Japan's top banks. The losses forced Mizuho Securities to delay a merger with smaller brokerage Shinko Securities by a year.

"From a risk management perspective, for banks to err on the side of caution in the current environment is not necessarily a bad thing," said Jason Rogers, credit analyst at Barclays Capital in Singapore.

It was not clear how much Mizuho spent to woo Brooker and the others, although two sources said offers were at least commensurate with the team's previous salaries. Mizuho offered 18-month contracts and guaranteed two annual bonuses for many of the hires, the two sources said.

Brooker declined to comment for this story, while spokesman Okano declined to comment on the compensation.

"I think Mizuho grabbed the team out of fear -- outright fear that Nomura would have something that they lacked," one of the sources said. When Nomura announced its Lehman acquisition last year, it cited electronic trading as one of the areas where the U.S. firm had a strong presence.

While Mizuho has struggled with its securities business, Japan's two other "megabanks" have expanded. Mitsubishi UFJ has taken a 21 percent stake in Morgan Stanley and Sumitomo Mitsui Financial Group bought Citigroup's Japanese brokerage, Nikko Cordial.

Meanwhile, the team members, their projects not yet fully on-line, spend their time fine-tuning trading strategies or checking market prices.

"It's not just the investment," said one of the sources.

"It's the opportunity that's been flushed down the toilet."

($1=92.24 Yen)

(Editing by Valerie Lee)