Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

The business of trading stocks has claimed another scalp this year. Nomura is shuttering its equities division in Europe, hot on the heels of Barclays' pullback from Asian equities.

The Japanese bank hadn't cracked the top 10 list in Europe, and Barclays had failed to do the same in Asia.

They won't be the last to scale back in the equities world as more banks pile into what was already a competitive business to escape losses elsewhere. That pressure won't go away anytime soon.

The safe zone for a global bank in terms of equities revenues stands at about $2 billion to $3 billion, according to Amrit Shahani of research firm Coalition. Revenue on that scale indicates a firm has the kind of market share that can offset competitive pressures and squeeze margins.

On that basis, traders at Morgan Stanley, Goldman Sachs, J.P.Morgan, Credit Suisse and Bank of America-Merrill Lynch, the top five global players, are in a position of safety. Those at other firms are more at risk. 

In relative terms, the equities business has been a rare bright spot for an industry struggling to adjust to tougher curbs on risk-taking and lending. Since 2010, revenue has climbed 23 percent to $49.8 billion at the top investment banks tracked by Coalition. That compares with a drop of 36 percent for fixed income, and a 5.5 percent pick-up in advisory and capital markets.

UBS, which moved early in 2012 to cut back much of its fixed income operation to focus on equities, reaped the rewards: a revival in earnings and its stock. It's therefore not surprising that most of the mood music from bank CEOs in recent years has been about expanding in equities rather than retrenching. Deutsche Bank is planning to hire about 100 people across equities trading, Bloomberg News reported last month, even as it slashes thousands of jobs and dumps assets to bolster its balance sheet. Credit Suisse has also said equities will be a "core area of focus" even as it shrinks its investment bank. 

Prime Time
Services for hedge funds made up the biggest single slice of banks' equities revenue in 2015
Source: Coalition data for top investment banks' total equities revenue in 2015

But the recent boom in equities has basically been thanks to one type of customer: hedge funds. Prime brokerage has grown to become a bigger slice of top banks' equities revenue than either plain-vanilla cash trading or derivatives. It's a reflection of how the post-crisis bull market has seen hedge fund assets under management swell to $2.9 trillion at end-September 2015 from $1.9 trillion in 2010, according to Hedge Fund Research.

Those hedge-fund customers may not be such a lucrative bet if the start of the year is anything to go by. Hedge-fund performance has declined almost 2 percent globally, drawing criticism from investors labeling it a "killer quarter." An increasing number of banks may find themselves chasing a shrinking sum of money.

And the costs of being in the business are rising. While the technological arms race in equities trading may have slowed down in the post-"Flash Boys" era, the electronic trading tool kit is still a significant spend. European rules designed to improve transparency are likely to increase costs (by imposing more reporting requirements for trading algorithms) and introduce curbs on the way commissions are charged.

European Pain
Revenue from investment banking are seen falling more in Europe than the U.S. this year
Source: Morgan Stanley research estimates for year-on-year growth

European investment banks' revenue is likely to drop in 2016, with equities sliding by as much as 15 percent, according to estimates by Morgan Stanley. In that climate, Nomura is unlikely to be the last to retreat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net