BarCap Rebuilds Cash Equities Business

Barclays Capital is aggressively hiring equities analysts and traders in Europe and Asia, aiming to build a global equities business around the U.S.-based infrastructure acquired from Lehman Brothers.

"We've been looking for the right opportunity to enter the cash equity space in an efficient way for many years," Dixit Joshi, BarCap's London-based head of Europe and Asia equities, told the Financial Times. "The acquisition of Lehman's U.S. business has given it to us in one fell swoop." He said BarCap aims to be among the world's top five equities dealers within three years - a stature that the FT says would require a staff of hundreds in Europe alone.

For our part, we note that Barclays also has long talked up its strategy of expanding the U.S. fixed-income business. The bank continued taking that line even after fixed-income markets began seizing up more than a year ago.

Barclays had a European stockbroking and investment operation in the 1990s, called BZW, but sold it in 1997.

Broad Trend Afoot?

Recent steps BarCap has taken to rebuild the equities business include:

- Snatching 60 ex-Lehman employees in Europe out of the hands of Nomura, which acquired Lehman's European operations.

- Hiring nearly 100 ex-Lehman employees in Japan.

BarCap's latest plan may signal a broad industry trend, the FT says. The business of researching and trading cash equities for clients is regaining favor as an old-line, relatively simply type of operation that doesn't require an institution to expose its own capital to exotic illiquid assets or proprietaty trading.

However, the outlook for banks' equity business is mixed at best.

On the plus side, client-driven or "flow" trading is a relatively safe way to earn commissions and fees, without placing the bank's capital at risk. And sell-side research is finally regaining clout among fund managers after a period of ill repute following the biased-research scandals of the 1990s. Buy-side research staffs - which swelled over the past decade as funds bulked up in-house analytical teams - are being cut back now that assets under management are in free-fall. "Because of all this volatility, people are looking for more execution help," U.S.-based fund industry consultant Larry Tabb told the FT. Finally, the disappearance or merger of three former bulge-bracket institutions (Lehman, Bear Stearns and Merrill Lynch) has created something of a vacuum which other sell-side institutions could fill.

On the down side, equity trade volume is shrinking across the board. Next year, equity revenues of investment banks may fall as much as 20 percent in the U.S. (Tabb Group estimate) and 40 percent in Europe (Morgan Stanley estimate). The bread-and-butter customers, hedge funds, are pulling back sharply as market depreciation and investor redemptions wreak havoc on their asset base. Before the crisis, they accounted for more than 40 percent of all stock trading volume. Finally, trading commission rates remain in a secular decline.