However, starting in 2009, the historical relationship between volatility and sellside equities trading revenue began to break down. The reason: post-financial crisis regulations in the EU and US placed new limits on the ability of banks to generate revenue and profits from proprietary equities trading. Meanwhile, between 2006 and 2014, GreySpark analysis of the gap within sellside equities trading businesses between the total amount of equities volumes traded globally per year versus the amount of e-trading capacity banks had to meet client demand for that liquidity showed that the gap is narrowing.
Faced with a new profitability paradigm that was – in part – defined by decreasing levels of equities liquidity fragmentation, the sellside responded by cutting jobs and by spinning-off or shutting down proprietary trading desks. As a result of these cost-cutting exercises, the long-term outlook for the profitability of sellside stock trading businesses in 2015 now appears better despite the fact that levels of volatility in key equities markets remain near historic lows.
The sellside’s rationalisation of its equities trading business models has not occurred without consequence. As banks reduced the scope and size of their equities trading businesses – which were, in many cases, global franchises – buyside clients responded by attempting to fill the void left by the sellside. In many cases, the largest buyside firms are developing their own global equities trading businesses in 2015, taking advantage of cost-effective, sophisticated trading stacks to create centralised equities dealing desks that are based on a single, cross-asset trading position.
This report characterises how the end of a slow reduction in the ability of banks to oversupply buyside clients with cash equities trading capacity is reshaping the future aspirations of the banking industry’s cash equities business and trading models. In 2015, as buyside clients increasingly compete with banks in running automated equities market-making businesses to service their owns demands, each bank is faced with a choice: monetise the whole equities franchise by increasing investment in the areas where strengths traditionally lie; or reduce the multi-regional or global ambitions of the equities trading business to cut the cost-per-trade associated with an overcapacity of trading technology compared to client demand.