(Bloomberg) — Theres a secret list that Citigroup Inc. keeps on its equity-research desk at its swank new campus in Tribeca.
And if youre not on it — well, you might as well be nobody.
At the top is a handful of hedge-fund giants, the Focus Five, that bring in big money for Citigroup: Millennium, Citadel, Surveyor Capital, Point72 and Carlson Capital, according to a person with direct knowledge of the list. It represents a growing trend on Wall Street where the most- lucrative clients get the best service: the top trade ideas, hours-longcalls withanalysts, intimate soirees with executives, bespoke trading models, on and on.
Across the global financial industry, a new class system is emerging. Banks are jettisoning the we-do-everything model to cater to prized clients that generate the most revenue while turning othersaway. At Citigroup, Morgan Stanley, HSBC Holdings Plc and more, entire businesses are being focused on the wealth and influence of a new financial elite — what amounts to the 1 percent of the 1 percent.
And with the rise of this 0.01 percent, one thing is clear: Even on Wall Street, the divide between the privileged few and everyone else is growing — and fast.
Rude Awakening
Its a rude awakening when you find out that research isnt readily available from Wall Street banks, said Jeff Sica, who oversees about $1.5 billion as the president of Circle Squared Alternative Investments in Morristown, New Jersey.
Scott Helfman, aCitigroupspokesman, said the bank doesnt comment on its relationships with clients, while Morgan Stanleys Tom Walton declined to comment. HSBC said in a statement that its reducing the number of dormant and low- revenue clients to help the firm build a more sustainable business.
Whether its in equities or fixed-income, the shift in priorities is undeniable.
Morgan Stanley now ranks its most-profitable European fixed-income customers in three groups — supercore, core and base, said people familiar with the matter, who asked not to be identified because they arent authorized to speak publicly. Everyone else — about 2,000 firms in total — has limits on their access to the companys management, sales and research departments.
Client Cull
At HSBC, about half of its 3,000 financial institution customers across the currency, debt, equity and trade finance businesses have been cut in the past 18 months, a person with knowledge of the matter said. Europes largest lender also created a group of less than 200 institutional and other financial clients that are its highest priority.
Even smaller banks have come up with their own client lists targeting a select number of investment firms, with Stifel Financial Corp. dubbing a roster of 21 top-tier targets as its Blackjack list. Chief Executive Officer Ronald Kruszewski, whose firm bills itself as the biggest provider of equity research in the U.S., said in an interview that his equity sales unit had compiled such a list about three years ago, but that its currently not in use.
I would be surprised at any firm that is trying to sell a product that didnt have a list, Kruszewski said.
In some ways, the banks have little choice.
In the post-crisis world of stricter regulations and rock- bottom interest rates, banks are struggling to boost profitability. Income that commercial banks get from making loans has slumped, while new rules have made it much harder to earn easy money from trading bonds, currencies and commodities – – long the biggest source of industry profits — by curbing the firms risk-taking and forcing them to hold more capital.
Little Choice
At the biggest investment banks, revenue from fixed-income sales and trading fell to $61.8 billion last year, the fifth decline in six years, according to Bloomberg Intelligence. While Wall Street ultimately eked out a record year of earnings by slashing jobs and cutting costs, most firms failed to generate a return on equity of at least 10 percent — a keymeasure of profitability.
Things havent been much better in 2016. In the past month, both Citigroup and JPMorgan Chase & Co. warned total first- quarter trading revenue will drop. Credit Suisse Group AG CEO Tidjane Thiam said Wednesday the bank will be more selective on client coverage after incurring losses tied to fixed-income trading positions.
Everyone is talking about how you go about boosting profitability, said Greg Braca, head of U.S. corporate and specialty banking at TD Bank. Banks are going to very much cherish their house accounts and core clients.
Top Payers
At Citigroup, thats meant catering to the big hedge funds that consistently trade more than anyone else, said the person familiar with the banks internal practices. This year, the bank winnowed its favored list to fewer than a hundred to devote more attention to its top-paying clients and discouraged analysts from spending time on anyone else,the person said. The analysts have quotas to ensure they keep in touch regularly. They must track their progress on a spreadsheet.
To make the cut, firms typically need to generate at least $2 million annually in equity trading revenue with the bank. Though precise numbers are hard to come by, the Focus Five shops may trade multiple times that amount. The hedge-fund firms, which held roughly $120 billion of U.S. stocks at the end of last year based on filings compiled by Bloomberg, are some of the biggest and most well-known in the business.
Focus Five
They include: Israel Englanders Millennium, a multi- strategy manager known for making millions of trades a day and picking off tiny profits from each; billionaire Ken Griffins Citadel empire, whose market-making business is one of the U.S. stock markets biggest automated traders; Point72, which oversees the personal fortune of billionaire Steven A. Cohen, who once captivated Wall Street with an almost preternatural knack for reading the markets while running SAC Capital.
Carlson Capital, the Dallas-based hedge fund founded by Clint Carlson, who helped manage the Texas oil fortunes of the famed Bass brothers, and Surveyor, a separateCitadel hedge-fund unit that trades equities across 29 teams, round out the group.
Representatives for the hedge funds declined to comment.
Its not just equities. Citigroup keeps lists of accounts across its businesses, some ranked by assets, others by trading volume, said another person with knowledge of the banks internal practices. The company identifies favored clients by platinum, gold and silver status. On the credit research desk, a priority list includes BlackRock Inc., Fidelity and Franklin Resources Inc.
At Morgan Stanley, the firms European list of supercore clients includes BlackRock and Pacific Investment Management Co., the people familiar with the matter said. The bank began analyzing its client base in 2012 and looked at every interaction its sales team had with customers, from instant messages to phone calls and meetings. They found about 75 percent of revenue came from roughly 25 percent of clients, the people said.
While providing the top-paying funds with the best service is well within the rules, the various rankings and methodologies highlight just how far banks are willing to go as they shift toward a model that relies exclusivelyon a small number of clients.
If you want to sit down and talk to an analyst or strategist, clearly the biggest clients are the ones that get first cut, saidVoya Investment Managements Paul Zemsky, referring to prevailing Wall Street practices. The head of multi-asset strategies at Voya helps oversee $210 billion.
One money manager, who asked not to be identified for fear of reprisals, says she doesnt even bother calling up top analysts at the major banks. Shes come to understand that her firm doesnt have the pull to get her calls returned, even though it oversees billions of dollars.
Some say its just the reality on Wall Street, where banks are under pressure to restore profitability in a business thats become increasingly regulated over the past 15 years. That makes favoring their best clients a no-brainer.
Its a dog-eat-dog world, said Kevin Kelly,the chief investment officer at Recon Capital Partners in New York. Its tough but thats just how it works.
–With assistance from Katherine Burton and Oliver Renick.
