Morning Coffee: Citi to make equities cuts after a miserable first quarter. The bank that was too kind to a hedge fund

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We knew from the results that it had been a bad Q1 in equities trading for Citigroup – revenues down 24%.  But now it seems like action is being taken.  One of the Citi “dark pools”, a system called CitiCross, shut down at the end of April, with the SEC filing confirming that it had done so published on Monday.  The company statement is pretty uninformative – a “strategic review of our equities business”, but despite the statement that “we continue to invest in talent and technology”, it feels like redundancies are likely to follow.

The problem with CitiCross appears to just be that it wasn’t very popular.  Dark pools and “alternative trading systems” are very much market share driven games.  If you can drive the order flow to your own network, you can match client trades against each other and give both sides of the deal a better price than they could have achieved on the public market.  If you can consistently offer better pricing, then the clients will come back for more and a virtuous circle is created.

CitiCross, on the other hand, seemed to be quite a long way into a vicious version of the same circle.  Out of 32 active dark pools in the USA at present, it ranked 23rd during the week of 15 April, matching trades in 25 million shares in units of 200 shares a time.  When you compare that to CS Crossfinder, which did 196m shares in the same week, or JPM-X at 151m – let alone the market’s biggest pool, UBS ATS which cruised along at 424m shares – it’s easy to see why Citi management thought that CitiCross was not justifying the investment already made, and was unlikely to ever generate the trading volume it needed to stay in the game. 

There will still be one Citi dark pool kept going – Citibloc, which does even fewer trades than CitiCross, but which is concentrated on the much higher margin business of matching large block orders.  But the demise of this trading system might raise some questions about where the true minimum efficient scale is – Morgan Stanley’s Trajectory and Bank of America’s Instinct-X networks are roughly double the size of CitiCross, but half the size of the Deutsche Bank and Goldman Sachs' dark pools.

And although it feels like closing down this ailing order-matching system is more likely to be a positive for Citi equities earnings in the second quarter than a negative, the fact remains that management are clearly now facing up to some hard questions about what it’s realistic to expect in terms of market share and whether the franchise can be expected to support a presence in every market where clients want to deal.  Jamie Forese left the top job at Institutional Clients Group last month after all, saying that “now is absolutely the right time to pass leadership … to new hands”.  When you think about it, that’s potentially quite a double edged statement.

Over in the world of high-touch, client service oriented trading, on the other hand, a cautionary tale for Jeffries about the dangers of being too accommodating to a hedge fund client.  The former CIO of the former hedge fund Carbon Investment Partners just lost an arbitration decision of $15m, after setting up side-pocket trading accounts and using $10m held in a Jeffries prime brokerage account as collateral to carry out a slew of speculative trades aimed at making back previous undisclosed losses.  The scheme finally fell apart after Lee Bressler put a position on in Tesla which was 45 times the fund’s trading limit; at times he had trades on equal to 3000% of Carbon’s assets under management.

Jeffries strenuously denies doing anything wrong and emphasises it was fully transparent to the other partners at Carbon as to what was going on.  They weren’t defendants in this arbitration case, but Bressler’s rogue trades left them with a deficit of $2.5m in the prime brokerage account at the time the balloon popped, which is now the subject of its own arbitration case as to whether the Carbon Partners are going to have to make it good.  All in all, this looks like a one of those clients you wish you’d never met.

Meanwhile…

Eileen Murray of Bridgewater is, according to rumour, considering leaving the mothership and has been talked about in connection with the Wells Fargo CEO job, the one that appears to have been turned down by almost everyone in banking.  She is apparently not unhappy in her current co-CEO role in Connecticut, so if she’s tempted to move for money and prestige, we might see the Principles take root in a corporate giant (WSJ)

More hard decisions being taken by global franchises – Morgan Stanley, as of Q1 2020, will no longer be doing investment banking business in Russia (Reuters)

The Qatar deal is the one that generated the headlines, but arguably the other big transaction carried out by Barclays when it was trying to raise capital in 2009 has more long term significance.  A ten year retrospective on the deal which made Blackrock the biggest in the world and ensured that (through iShares) it would dominate the ETF world (FT)

According to Boston Consulting Group, the asset management industry could see profits falling 30% by 2023.  It advises firms to “cut costs or expand aggressively”; presumably you have to retain them in order to find out which. (Financial News)

Gary Cohn “bear hugged the relationship”, but Goldman Sachs couldn’t beat out the Morgan Stanley tech team led by Michael Grimes, whose evenings moonlighting as an Uber driver finally helped MS land the top-left spot on the ride hailing firm’s IPO.  Goldman will have to dry their tears with the huge amount of money their internal tech investing fund made as an early stage investor (Bloomberg)

A number of uncomfortable home truths for Deutsche Bank shareholders in this strongly worded opinion piece about the role of the supervisory board and its chairman in creating the bank’s current troubles (Bloomberg)

The most bittersweet moment for a senior banker – one of your best guys gets poached, by one of your best clients (AFR)

A sort of Discovery Channel for the super-rich – a new report details the migratory habits of millionaires.  The most popular destination is Australia. (Finews)

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