In recent years, equities trading has looked like the dystopian scenes at the start of The Terminator, with human beings stuck in increasingly precarious niches, hiding from the high frequency and algorithmic systems who are taking over their world. But has the Human Resistance found its moment?
Tidjane Thiam has probably not been sent back in time by a group of embattled cash equities traders to turn back the course of history, but it may end up being significant that a bank which had historically been in the vanguard of algo trading is now openly discussing how important its high-touch and block-trading businesses are, and the high-profile MD level hires it has been making to support them. Meanwhile, JP Morgan has hired a senior trader and salestrader in Europe and in the last month, Bank of America has poached David Kim as its (human) head of flow trading.
In the case of Credit Suisse, the new strategy appears to be driven by Mike Stewart, the global head of equities trading who joined last summer from UBS. It has also been driven by necessity – Stewart was brought in to replace Tim O’Hara in the wake of some sharp market share losses, partly driven by algorithmic trading misfires And market share in cash equities just isn’t as valuable as it used to be, given the extremely low spreads.
So banks are looking for profits back in the business of block trading, and this is much more of a people business. Algorithms with high-frequency data feeds can tell you a lot about what can be deduced about supply and demand from what’s trading, but it’s a lot more difficult to get a sense of what the market clearing price might be for blocks of securities among people who are not currently trading, but might be persuaded to do so if the price was right.
To do that requires the sort of knowledge of investors’ positions that only comes from a fairly intimate trusted-advisor relationship; block trading is the point of contact where sales and trading blends into capital markets and advisory. And high-touch sales trading is just block trading with smaller blocks. They’re both concerned not so much with facilitating trades that the client wants to make, as with suggesting trades that the client didn’t know she wanted to make until someone passed on some information about another potential buyer or seller. For the moment, that’s quite hard to automate, and to the right kind of investor it’s extremely valuable.
Separately, anyone holding US bank shares might be in for a dividend or buyback windfall this year, as the indications are that, despite incorporating the harshest macroeconomic scenarios seen so far, the CCAR results, to be published on Friday, won’t see any major US lenders’ cash distribution plans refused. Payout ratios of 96% are being talked about. The US banks’ ability to do this is partly because they have built back capital buffers aggressively from the strong profits of the last few years, but it also might be that they are learning, slowly to give the Fed what it wants to see.
As American Banker puts it, “banks have developed a certain amount of expertise over the years” in creating regulatory scenarios. Added to this, the rules have changed this time round so that the dreaded and unpredictable “qualitative fail” based on inadequate systems of planning, is no longer considered a reason for the Fed to stop dividend payments. Of course, non-US banks have been significantly slower to develop that sort of expertise, and so we might expect to see quite a few failures among the foreign Bank Holding Companies being tested for the first time. But even the Europeans will eventually find out how to work within the system.
Softbank is planning to set up a new employee long term incentive scheme, and to invest it in the Vision Fund. (FT)
Gender pay gaps look much worse at Magic Circle law firms when equity partners are included in the data. (FT)
Rich millennials (they exist) want advice on cryptocurrency from their wealth managers. (Bloomberg)
But John McAfee has stopped advising over Twitter on crypto ICOs after “threats from the SEC” (Fortune)
Robots may not be able to handle block trading, but they can solve a Rubik Cube on their own. (Technology Review)
Deutsche Bank has shifted a $1bn portfolio of shipping loans. (FT)
BoA Merrill Lynch has paid a $42m fine to settle a case over misleading customers about its dark pool. (Reuters)
German savings banks are withdrawing their most expensive accounts, to the rage of savers. (Handelsblatt)
Beware of financial PTSD. (Of Dollars and Data)
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