Big Investment Banks Thinking Outside the Box to Replace Lost Profits

Terry Flanagan

As investment banks continue to lick their wounds stemming from low trading volumes and increasing regulatory pressures, the sell side are now beginning to look at slightly less glamorous activities to beef up their bottom lines as previously profitable operations—like stalwarts such as fixed income—are being scaled back.

A spate of job cuts in the last 18 or so months at many of the world’s leading investment banks, including the headline-grabbing announcement from UBS last month when the Swiss bank culled 10,000 jobs, mainly from its struggling fixed income division, it has led many banks to re-evaluate their trading operations.

It appears that a paradigm shift may have taken place following the financial crisis and a lot of the old cash cows for the sell side, such as fixed income, have significantly dried up due to onerous regulations and decreasing volumes. But this hasn’t stopped some from eyeing new opportunities in this more barren landscape.

And in the equities arena of the investment banks, volumes are also down significantly. “Cash volumes continue to remain a challenge,” said Doug Braunstein, chief financial officer at JP Morgan, in the bank’s third quarter conference call.

But in this shrinking equity trading environment, the maxim of survival of the fittest may well be beginning to be borne out.

“The client wallet has been dropping, volumes on the market have been dropping and for many firms this creates pressure across all fronts, in particular on the cost base,” Andrew Morgan, co-head of equity trading for EMEA at Deutsche Bank, Germany’s largest bank, told Markets Media.

“So what that means is we have a fragmented and highly competitive equity landscape with many banks competing for client wallet. For some firms this has been a challenge and we’ve seen some scaling back from specific activities.

“But that is a function of the competitive and cost pressures participants are under and the change in the macro environment. Banks are scrutinizing different business lines in a way that is more detailed than was the case before.”

One of these new business lines Deutsche Bank is pursuing is dbIntegrate, which is basically an outsourced equities trading service that combines Deutsche Bank’s expertise in securities brokerage, settlement and custody to make access to equity markets more efficient for small and mid-sized brokers who are struggling to adapt to falling volumes in equities. The service makes use of Deutsche Bank’s connection to over 30 central securities depositories globally as well as access to around 70 venues.

“By being able to own the whole value chain and the whole trade lifecycle, we are able to reduce the marginal cost for the clients quite significantly,” said Morgan.

Morgan also revealed that some of Deutsche Bank’s competitors had even come to them to talk about solutions through dbIntegrate, which suggests that others on the sell side are finding things extremely tough going in these difficult times.

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