It's time banks got serious about laying people off in their equities sales and trading businesses. This is the implication of newly released analysis of divisional performance in 2017 from research firm Coalition.
2017 was a bad year for equities professionals in more ways than one. Operating margins fell to their lowest level in five years, at just 22%. As the chart below shows, margins in equities sales and trading ended 2017 at 1,600 basis points below margins in fixed income, currencies and commodities (FICC) sales and trading, and 1,400 basis points below the investment banking division (IBD). As recently as 2015, equities margins were the highest of the lot. Coalition says they have been particularly eroded by costly investments in trading technology.
It's unfortunate, therefore, that increased spending on equities technology coincided with falling equities revenues. As the second chart below shows, revenues in equities sales and trading fell 16% between 2015 and 2017.
It's not just equities. FICC revenues have fallen too (by 17% since 2013). However, banks' FICC margins have showed some signs of recovering, whereas equities margins have fallen since 2015.
There's a reason for this, and it's about more than costly investments in tech. While banks have already taken an axe to fixed income headcount, they've only just begun in equities. As the third chart below shows, headcount cuts in fixed income were dramatic between 2013 and 2015. By comparison, banks only really began cutting in equities when revenues plummeted in 2015. As a result, the equities sector is now the most populous, whilst being close to generating the smallest revenues on by far the smallest margins. This doesn't look sustainable.
Should everyone in equities be equally concerned? No. The final chart below suggests that cash equities and equity derivatives professionals have most reason to feel angst: revenues here declined 19% and 26% in the two years prior to 2017. By comparison, they were down only 8% in prime services and 3% in futures and options.
2018 may grant some reprieve. Increased volatility should create revenue opportunities in equity derivatives as clients hedge exposure to unpredictable markets. Banks like Deutsche are explicitly chasing equity derivatives revenues for this reason.
Nonetheless, the pressure is on. At Credit Suisse, equities revenues fell last year despite heavy investment in new staff; CEO Tidjane Thiam has indicated there won't be any further recruitment without clear results. At Goldman Sachs, increasing equities revenues is one of this year's priorities, but any hiring is unlikely to benefit traditional equities traders and salespeople: CEO Lloyd Blankfein said 70% of the firm's hires for new electronic trading systems last year were engineers. If banks really want to increase equities margins they could begin by conducting a more thorough clear out of existing staff and replacing them with people who can tend the new automated systems.
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