U.S. Banks Take on More Stock Risk in Europe Share Grab

  • Wall Street firms offer more risk for cash equity trades
  • Europe’s MiFID II rules will upend trading, fee structure

Wall Street firms jockeying for position in European cash equity trading have been increasing the amount of risk they are taking on to lure business, according to people familiar with the matter.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. are among banks that are increasingly willing to use their own balance sheet to increase the number and size of client trades, said the people, who asked not to be named citing confidentiality.

Goldman Sachs recently priced a $10 million “risk trade,” meaning the bank will hold the position and take on the risk, for a fee of 20 basis points, a fraction of the 1 percent it typically offers this client on similar trades, one person said. The client is now trading with Goldman Sachs instead of other banks because of Goldman’s willingness to take on such risk at such a low price, the person said.

U.S. banks are particularly aggressive in their offerings relative to their European peers, two of the people said. The amount of risk offered to clients depends on the client’s size and the bank’s relationship, the people said.

Representatives for Goldman Sachs, JPMorgan and Citigroup declined to comment.

The rise in appetite for risk is a reversal of the more conservative trading environment ushered in by crisis-era regulation a decade ago. Europe’s MIFID II laws, which kick in on Jan. 3, will upend how banks trade with clients and how they charge for research and trading commissions. Banks competing to defend or increase their share of equity-trading revenues after MiFID starts may trigger a price war in execution, while some are more eager to tout their array of trading options before MiFID encourages investors to shop around.

Not everyone is cutting prices. While more and more clients have been migrating to so-called low-touch electronic trading across asset classes, higher-service risk trades remain when clients seek discretion and financing to trade large blocks of equities. At Citigroup, which has grown market share thanks to more client demand for risk, prices to trade more illiquid blocks have been rising, one person said.

Revenue from trading securities has been weak across the industry, with calm markets and long periods of low volatility resulting in a lack of client interest. Still, lenders in both Europe and the U.S. saw their equities businesses fare better than fixed income in the third quarter, giving those units a bigger slice of the income generated by their investment banks.

— With assistance by Hugh Son

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