A new report from GreySpark Partners, a leading global capital markets consulting firm, shows how investment bank equities trading businesses are returning to profitability in 2015 after a sustained period of declining revenues following the onset of the financial crisis. However, in order for those businesses to remain profitable in the future, the report argues that banks must choose between the operational costs and demands associated with running a global equities trading franchise versus running a business that is focused on meeting the needs of specific types of clients on region-by-region basis.

The “2015 Trends in Equity Trading” report shows how there are four main components underpinning the sell side equities trading business: a research offering, a trade execution offering, prime brokerage services and post-trade services. GreySpark has analysed the equities business models of 36 banks and found that, increasingly, only a handful of those banks are able to continue operating a global shares trading franchise. The remaining banks are increasingly under pressure to assess the strengths of their equities trading business model across these four pillars, and to then emphasise those strengths to a regionally-specific or economic sector-specific client base - in an effort to either retain or expand an existing level of client market share.

According to GreySparks observations bank operating a global equities trading franchise interacts with clients in markets in Asia-Pacific, the Americas and Europe, offering those clients services generated by each of the four components contained within its franchise. Meanwhile, a bank operating a regionally-focused equities trading franchise interacts with clients only in the specific markets or economic sectors where at least one of the franchise’s four components is stronger than the others, giving the bank an advantage in retaining client business in that region.

Those banks represent a so-called ‘disappearing middle’ within the sell side equities trading landscape. Faced with a new equities trading profitability paradigm following the start of the financial crisis, many banks responded to new EU and US regulations limiting proprietary trading activity by cutting jobs and by spinning off or shutting down large portions of their shares trading franchises. As a result, buyside clients responded by attempting to fill the void left behind by declining levels of sellside equities trading activity, developing their own global equities trading desks and increasingly competing with banks and non-bank brokers in running automated market-making businesses to service their needs.

Frederic Ponzo, GreySpark managing partner and lead author of the report, said: “As buyside clients become more sophisticated in operating equities trading businesses, many banks are now faced with a choice: monetise the whole of their equities franchise by increasing investment in the areas where their strengths traditionally lie; or reduce the multi-regional or global ambitions of the business to cut the cost-per-trade associated with an overcapacity of trading technology compared to client demand.”

Russell Dinnage, GreySpark senior consultant and report co-author, added: “Starting in 2009, only the largest banks were willing or able to continue to maintain global ambitions for their equities trading businesses. The remaining banks are increasingly being forced by a largely newly-empowered base of buyside clients to either reduce their level of equities trading services or to redefine the focus of their existing services to better suit the specific characteristics of their client base.”