Citigroup and UBS had the biggest drops in revenue market share as trading losses exacerbated the industrywide decline. New York-based Citigroup shut its equities proprietary-trading unit in January after 2011 losses and changed management following what CFO John Gerspach called derivatives “underperformance.”
UBS said it lost 349 million Swiss francs ($372 million) in the second quarter tied to Facebook Inc.’s initial public offering. The Swiss firm has promised legal action against Nasdaq OMX Group Inc., which UBS said performed a “gross mishandling” of the IPO. The bank has the top market share in European equities trading, according to a Greenwich Associates survey of institutional investors released last month.
Earning commissions and spreads from trading common shares on public exchanges accounted for about 40 percent of investment banks’ equities revenue last year, according to Coalition data. Less than a quarter came from equity derivatives, which include exchange-traded funds and uniquely structured bets on market volatility. An additional 30 percent came from prime brokerage, and about 10 percent from futures and options.
In 2007, derivatives accounted for about 40 percent of the total, while cash equities generated 29 percent and prime brokerage 24 percent. Options and futures contributed 7 percent.
Equities trading also may have been hurt by a lack of confidence in market structure after $862 billion was erased from stock values in 20 minutes in the so-called “flash crash” of May 2010. This May, Nasdaq was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading in Facebook shares. In August, Knight Capital Group Inc. was rescued by an investor group after a computer malfunction caused a $440 million trading loss.
Each incident has hurt retail investors’ willingness to trade, Glickenhaus said.
As long as the economy continues to struggle, “these businesses are going to be slow to get to their former form,” said Davis of Farr, Miller & Washington. “Unfortunately, that’s the new reality.”