Drive for five.
That’s Deutsche Bank’s ambition for U.S. equities, to leapfrog into the highest echelon of brokers and be among the top five firms, according to Andre Crawford-Brunt, global head of equity trading at the firm.
Crawford-Brunt revealed Deutsche Bank’s plans for its U.S. stock trading arm during a recent interview in which he also predicted that volumes should bounce back in the second half of the year.
In the last year, things have been looking up at Deutsche. In Greenwich Associates’ recent annual survey, Deutsche worked its way up the market share ladder, climbing to number seven in U.S. equities. Just a few year’s ago, Deutsche was twelfth in market share. That’s why the firm is optimistic about its future and why the bulge bracket broker has its eyes cast upon its next big move.
"We view U.S. equities as a key growth area and our goal is to be [in the] top five in the U.S," Crawford-Brunt told Traders Magazine. "The jump to the top five is paramount to our ambitions."
How has Deutsche moved up the ranks? Some suggest that a stronger electronic trading group has helped. One industry executive traces Deutsche’s rise in the ranks to the hiring of Jose Marques in early 2010. Marques joined as global head of electronic trading from industry leader Credit Suisse. A number of initiatives have been put into place under his watch.
Also, others say that Deutsche has benefitted from the buyside leveraging relationships. This has come at the expense of agency brokers and others, as money managers have cut down on their number of trading partners. Some commissions from agency brokers have flowed to Deutsche, they suggest.
Deutsche credits high touch as a factor for its success. Its strategy so far has been to alter how its high-touch desk interacts with the buyside. First, Deutsche has expanded the roles for both traders and sales traders, giving each more of the other’s responsibilities. Now sector traders are increasingly talking to the buyside, providing sector color and getting orders. Also, cash sales traders are more and more executing orders on behalf of the buyside via algorithms.
The end result? The buyside gets its orders executed faster and more efficiently with a "unified" touch point with clients. In addition, Deutsche is providing the buyside with more transparency on high-touch trades. Its Trade Pad product gives clients the ability to see how their high-touch orders are being handled in real time–much like their electronic trades.
And for one large buyside firm, the strategy is working so far. He told Traders Magazine that Deustche Bank is one of his "core brokers."
"They do a good job on the cash equity front," the buysider said, "The bank has solid high-touch coverage, though we have not adopted their electronic tools into our workflow."
A second buysider at a long-only asset manager also spoke positively about the broker. After a recent meeting, he said he was "pleased" with the firm’s strong research and trading capabilities.
Crawford-Brunt has brought on new hires to spearhead the assault on the top banks and grab volume. Earlier this year, Tom Patrick joined the firm as head of equities for North America. Patrick, a 20-year veteran, was formerly co-head of global banking and markets strategy for BofA Merrill.
Also, Joseph Spinelli will be joining in August as a managing director and head of North America cash equity trading. Spinelli joins from Goldman Sachs, where he was a managing director and financial services sector head for equity trading. He was previously the head equity trader at Ziff Brothers Investments.
The bank has also hired three sales traders for its electronic trading business. Most recently, Scott Chinitz, a 12-year veteran, joined from RBS. He has industry experience on both the buyside and sellside. Rob Lippert, a 14-year pro, will join in August. A former buysider, he most recently was at Goldman Sachs. In the first week of September, Ryan Lee, a 10-year veteran, will join from ITG. All three report to Jay Fraser, head of Autobahn equity sales and execution for the Americas.
Despite the additions, the road to the upper echelon is not going to be easy. While Crawford-Brunt is optimistic that U.S equity trading volumes will pick up in the next six to 12 months, current conditions paint a different picture.
Greenwich Associates’ latest commission survey reports U.S. institutions spent $6.2 billion in commission dollars on sellside U.S. equity research and advisory services from Q1 2011 to Q1 2012, down from $6.8 billion in the prior 12-month period. The decline was primarily driven by a 6 percent drop in the overall amount of commissions paid by institutions on trades of U.S. equities.
Add to this the fact that competition is strong. According to the latest Greenwich survey, Credit Suisse is tops in the U.S. equity space with a 9.5 percent trading share, followed by Bank of America Merrill Lynch (8.9 percent), J.P. Morgan (8.9 percent), Goldman Sachs (8.6 percent) and Morgan Stanley (8.4 percent).
Crawford-Brunt explained that the trend in equity volumes suggests the market is approaching a turning point. He looks at unemployment figures, which are a lagging indicator of a growing economy, that suggest that U.S. equity volumes should begin to turn up in the second half of the year.
"The equity turnover rate is at its historical average; volumes will rise with an increase in outstanding shares via stock splits and issuance," Crawford-Brunt said. "We expect sustained increases in the equity market will lead to a revival in stock splits, and equity issuance should pick up on pent up demand from private equity and growth firms."
On the technology front, the firm recently introduced a new liquidity-seeking algorithm that aims to use some of the same strategies employed by high-frequency traders. This is in response to recent concerns about HFTs and their ability to trade ahead of the buyside.
Based on an earlier Deutsche Bank algo model, the new customizable algorithm, dubbed Stealth, uses high-frequency alpha models to source liquidity in both bright and dark venues. The algorithm adapts to intraday market conditions and attempts to reduce the ability of HFTs to step ahead of large orders.
Deutsche also introduced another algorithm dubbed TargetClose that is designed to project each day’s closing volume based on real-time and historical market data. It continuously adapts to market conditions in order to minimize the trade’s deviation from the closing price on the date of the trade.
On the research front, the firm continues to expand upon its offerings. While it continues to publish research, corporate access is also being stressed as the buyside increasingly wants face-to-face time with corporate executives. The firm has responded to these requests by forming a dedicated corporate access team.
With personnel and new technology in place, Crawford-Brunt is now lying in wait for trading volumes to rebound so the bank’s investments can produce the jump in market share it wants.
"My expectation is that volumes will snap back in the next six to 12 months, and we have to be ready for that," he said. "We’ve added muscle while others are downsizing, and when the market turns around, we’ll be in a position to capitalize. We’re looking to win in this space."
