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The worst thing that can happen to an investment bank is losing money, closely followed by failing to make money. But it’s often surprisingly disruptive to find your franchise is making money, but not in the places where you expected it to. It’s early in the year, obviously, but if 2025 continues in its current direction, we can expect to see some of the bloodiest and most acrimonious compensation committees in living memory.
You can get something of a clue as to what’s going on by looking at the breakdown of revenues in Jefferies’ Q1 results — bearing in mind, of course, that unlike the rest of the Street it has a November year-end. These numbers capture December, which was a surprisingly good month for capital markets and advisory, and don’t contain March which . . . wasn’t.
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Capital markets down a bit, FICC down a lot, advisory up and equities up. Swapping March for December seems likely to be bad news for both capital markets and advisory, but good for equities trading — BGC Expand is looking for 25 per cent growth in the industry revenue pool. It’s an ill wind that blows nobody any good, and the uncertainty and volatility of the last quarter has been great for trading volumes.
This means that one of the perennial Cinderellas of the investment banking industry is going to have a rare moment in the spotlight.
Equities trading (particularly cash equities) is usually quite a horrible business. Unlike bonds, equity shares are “fungible” — one share of Tesla is the same as any other, they don’t all have different coupons and maturities. This has always meant that trading is a commoditised business, in which commissions tend to be bid down to the marginal cost. And the marginal cost is very different from the average cost, because in a world of high-frequency trading and latency optimisation, equities trading needs a lot of very expensive IT infrastructure.
Why do banks keep doing it? Well, sometimes they don’t. Deutsche Bank, for example, cut the entire equities trading business line in its 2019 restructuring. But even then, they weren’t able to get rid of equity research, the most Cinderellaish function of all.
The trouble is that, although it’s not a good business to be in nine years out of ten, and barely covers the cost of capital in the tenth, equities have a lot of synergies with everything else. Corporate clients care a lot about their share prices, and the ability to have conservations with them about what investors are doing is often very valuable to the advisory and capital markets teams. Like the real Cinderella, equity sales and trading do a lot of dirty and thankless work in making forecasts, collecting feedback and being available for “colour of the market” updates.
It is going to be unnerving at best for bankers in other divisions to anticipate a bonus season later in the year in which they are reduced to asking Equities to share the wealth.
The maxim for bosses going into compensation committees has always been that if you’ve got revenue, bang on about revenue. If you’ve got a franchise, bang on about the franchise. If you’ve got neither, bang on the table. Given that many second-tier banks spent 2023 and 2024 building up their capital markets and advisory practices by hiring rainmaker Managing Directors who have so far failed to make it rain — and given that any promises or commitments made to the new hires will further drain the pool for the rest — there might be some percussive meetings later in the year.
