Sell Side Pain


2011 has been a tough year for many independent research firms, and it has proven rough even for the equity businesses of large investment banking firms at the top of the commission food chain.  Equities departments are bracing for layoffs and lower bonuses.

The first quarter was a positive for the equity businesses of most large investment banks, but conditions worsened in the second quarter as share volume declined 30 percent compared to the second quarter of 2010. In Europe, notional value traded (in Euros) was down 14 percent.  In the third quarter volume and volatility soared as panic over Europe’s debt woes set in.   Heavy trading by clients helped commissions but most of the bulge brokers got hurt by their market making.

JP Morgan, UBS, Citi and BoA Merrill all reported declines in their equity businesses during the third quarter. JP Morgan’s equity business was down 8%, UBS down 30% (not including charges for rogue trading) and BoA Merrill said cash equities were off 7% with derivatives down more.

Volume in fourth quarter has increased significantly over last year and volatility, as measured by the VIX index, was at historically high levels.  Although positive for commission flows, the benefits can easily be washed away by losses in derivatives and market making, as the third quarter showed.

As Larry Tabb of the TABB Group recently pointed out, more financial regulation will be delivered next year than at any time since the Great Depression: “Dodd-Frank legislation will be finalized, OTC derivatives reform will be issued, the Volcker Rule nailed down, Basel III announced, the Markets in Financial Instruments Directive (MiFID) Review and European Markets Infrastructure Regulation (EMIR) will be completed and the SEC will finalize equity market structure rules.”

Besides coping with the deluge of financial regulation, bulge firms are still deleveraging their balance sheets and unwinding their proprietary operations in compliance with the Volcker Rules.  As equity assets under management have declined at institutional investors, so have commission volumes been dropping.  Don’t be surprised if 2012 brings consolidation at the top of the food chain, as well as the bottom.


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