JPMorgan Chase & Co. (JPM) is seeking to become one of the world’s three biggest stock brokers, lifting a division that has fallen behind its capital markets, equity derivatives and investment banking units.
The largest U.S. bank is trying to boost electronic trading and increase commission pools to climb from sixth place in cash-equities trading, said Tim Throsby, global head of equities in London. JPMorgan is ranked first in investment banking, equities origination, fixed income, commodities and currencies, while it comes second for derivatives products, according to research firm Coalition Ltd.
“One of the big themes for the firm is to bring cash equities up to that same level,” Throsby said in an interview in London. “There are some very obvious areas where we are working to improve, and where we think there is a great opportunity. Third or fourth place would be a realistic medium-term ambition, with second or third in the long term.”
The lender isn’t planning to hire more staff to accomplish the task, he added.
JPMorgan is betting that investments in electronic platforms and hedge-fund services will help it leap over rivals in an industry that has suffered from declining volume and profitability. The New York-based bank was late in boosting those offerings as it focused on advisory and sales, said analysts including Derek de Vries at UBS AG. (UBSN)
Equities revenue climbed 8 percent in 2013, helped by rising sales from derivatives, JPMorgan said in January. The stock rose 0.6 percent to $60.26 at 12:01 p.m. in New York.
The lender trailed Goldman Sachs Group Inc., Morgan Stanley (MS) and Credit Suisse Group AG in equity sales and trading revenue in 2013, according to data compiled by Bloomberg. It topped the others in fixed income, currency and commodity sales and trading revenue. JPMorgan came after Goldman Sachs as the top underwriter of equities last year.
“For JPMorgan, with its large number of leadership positions, the strategy is clear,” UBS’s De Vries, who recommends buying JPMorgan shares, said in a phone interview from New York on March 25. “Cash equities is one business that really stands out as having more work to do. It is not like the bank is a significant laggard that ignored the equities business. It is just that it is a competitive business.”
While rival Goldman Sachs bought Hull Group Inc. in 1999 to expand in electronic markets and algorithmic trading, JPMorgan’s predecessor, Chase Manhattan Corp., purchased the U.K.’s Robert Fleming Holdings Ltd. in 2000 for $7.7 billion to boost its fund-management and investment-banking businesses. The U.S. bank spent a further 1 billion pounds in 2009 ($1.7 billion) to buy Cazenove Group, a 190-year-old British brokerage.
JPMorgan hired Frank Troise from Barclays Plc in 2010 to run the firm’s electronic client-solutions business. Shuya Kekke joined last year from Goldman Sachs to head Asia-Pacific sales for electronic trading.
Throsby is a 27-year veteran of investment banking who took on positions in equity derivatives and trading at banks from Goldman Sachs to Lehman Brothers Holdings Inc. and managed Citadel LLC’s Asian operation. He joined JPMorgan in April 2010.
Investments in technology in the past four years have lifted the business’ offering to match that of peers, according to Throsby.
“What we are up against is that our competitors enjoy an entrenched feeling of familiarity and comfort from their installed client base,” the banker said in reference to electronic trading. “I am confident that we’ll break through as it is our relentless focus. It is a multi-year grind of taking market share every year.”
Throsby also said JPMorgan wasn’t as successful as other banks in recent years in getting paid for its services.
“In the past, those top players in this space were very aggressive in having persistent, repeated conversations with their clients, saying, ‘What are you giving us?’” he said. “That was never our approach. That’s something that other firms were far more effective at earlier than we were.”
Earnings at the corporate and investment bank, led by Daniel Pinto in London, tumbled 57 percent to $858 million last year in the fourth quarter, driven by a $1.5 billion charge from changing the valuation of some over-the-counter derivatives to incorporate funding costs, JPMorgan reported Jan. 14. Still, the bank said it was ranked No. 1 for global investment-banking fees in 2013.
Cash equities worldwide is suffering from lower profitability and shrinking volume, as more clients turn to automation and demand higher services for what they pay.
Orders completed by algorithms made up 51 percent of payments in Europe last year, up from 46 percent in 2012, according to Tabb Group LLC. The amount may rise to 52 percent in 2014, the research firm said. The share of commissions from traditional sales traders fell to 27 percent in 2013 from 32 percent in 2012 and will decline to 25 percent in this year, Tabb estimates.
Most banks are losing money trading stocks in Europe when their cost of capital is considered, BNP Paribas SA’s Yann Gerardin, head of global equities and commodity derivatives, said in January. Barclays Plc, UniCredit SpA and Nomura Holdings Inc. are among banks that have cut their equity businesses in the region amid declining activity.
Throsby said the equities business is a profitable one for the top five to six banks. The three biggest make “good money,” he said.
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