Nothing succeeds like success. Or, as the parable has it, “to the one who has, more will be given, but from the one who has not, even that little that they have will be taken away”. Anyone who has studied market share in trading businesses knows that the Matthew Effect holds with a vengeance. If you have dominant market share, you find it easier to match client orders, which means that you can offer tighter spreads and better pricing, which attracts even more market share. If you are lower down the league table, you’re always fighting to hold on to clients in the face of more competitive offers, until you finally get tired of losing money and give up.
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For the longest time, this effect underpinned the dominance of the Wall Street bulge bracket. But somehow, some time in the aftermath of the financial crisis, the big banks took their eye off the ball, and specialist trading firms like Jane Street, Citadel Securities and Hudson River Trading moved in. Now Jane Street has jumped to the top of the table, with $10.1bn of global trading revenue. Hudson River has broken into the top ten with $2.6bn of revenue and Citadel Securities is not far behind at $2.4bn (after a quarter-on-quarter fall).
More importantly, the specialist firms have profit margins that are in a different universe from incumbent banks. Citadel Securities had a 47% operating profit margin for the second quarter, with Hudson River at 59% and Jane Street at 69%. These numbers are somewhat flattered by the bull market and the amount of “good volatility” in the period, but even in the best conditions, the bulge bracket rarely breaks above 30%, and the second tier players are usually significantly worse than that.
There are a number of reasons why this is the case. The first caveat to make is that divisional accounting numbers for large organisations always include an element of overhead cost allocation which can distort things a lot when compared to a pure player. There is also likely to be some element of cross-subsidy with other, higher-margin businesses – the costs of the trading operations of big banks support revenue in capital markets, wealth management and even advisory.
But there is also the drag of compliance costs, which are much bigger when you have a full banking licence; you also have much less ability to take advantage of proprietary trading opportunities. And the simple fact of having been around for much longer can be a drag if it means you have a load of legacy technology infrastructure to support.
Which is, in turn, the real reason why the specialist firms are likely to continue and extend their invasion of a once well-protected trading franchise. Profit margins this high allow for a huge amount of reinvestment in systems and people. The bulge bracket had it their own way for a long time, but those days might be gone.
Elsewhere, Tim Ingrassia of Goldman Sachs is predicting that 2026 could be an all-time record year for M&A, with $3.9trn of transactions. The co-chairman of global M&A was backed up by Christina Minnis, Goldman’s head of credit finance, who told Bloomberg that “what we’ve seen in terms of corporate boardrooms and sponsor willingness to transact is really picking up”.
This is, of course, great news for the investment bankers. Going into the summer holidays, they might have been wondering how to save the 2025 bonus year; it looked like this would be a year in which sales & trading took all the rewards, and advisory banking would be left as the poor relations. But coming back after Labor Day, with an extremely strong IPO pipeline, and possibility of beating the records set in 2021, they suddenly have a much stronger case, even if a lot of that revenue is unlikely to close before the 2025 year end. After all, it would be a foolish compensation committee indeed that didn’t divert some of the cash generated by the trading desks to make sure that the banking franchise was maintained at top strength, wouldn’t it? Some cynics (and some traders) might ask questions like “didn’t you say exactly the same thing last year?”, but the great thing about being a banker is that the past is past but the future is always golden.
Meanwhile …
“If someone comes in on a Friday afternoon before a holiday weekend and announces that we are going to have to work through the weekend, the Young Turks say, ‘OK, let’s do it’. But the 50-year-old says, ‘Hey, wait a minute guys, do we really have to do this?’”. Michael Coles, who died this week, knew that it was time to step back after setting up Goldman Sachs’ first London office when he realised his enthusiasm for weekend all-nighters was dwindling. (The Times)
Anna Ashurov of BlackRock shows that sometimes it can make sense to divert your career path from the same front office jobs that everyone is going for. She went from leveraged finance at Goldman to “the operating side”, then led a transformation project at the brewery giant AB InBev before coming back to finance as head of growth strategy and client relationships for Aladdin. (Business Insider)
In finance, the tragic stories still seem to usually involve stimulants, but across the rest of the economy, more and more workers are testing positive for opiates. (WSJ)
It seems somehow wrong to think that you might be able to beat the gambling firms by using publicly available AI models, but some people are doing so, possibly because takeup of the same technology by bookies has been uneven so far. (WIRED)
How much do bank regulators spend on restaurant dinners? Less than the bankers they regulate. (FT Alphaville)
One of his hedge funds is in Chapter 11, his mother is suing him and Amex is stopping his black card over a $370,000 bill. Looks like it isn’t the greatest year for Jason Ader. (NY Post)
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