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Rupak Ghose is formerly a financials research analyst at Credit Suisse and head of corporate strategy at ICAP/NEX
If Mark Twain was surveying Wall Street investment banks, would he say “Lies, damn lies and league tables”? My first job on Wall Street more than two decades ago was as a sellside equity research analyst and we were obsessed with league tables. We would wait eagerly for the annual Institutional Investor survey to come out and how we performed gauged how much we got paid.
With the innovative zeal that bankers adopt when bonuses are at stake, my head of department always managed to spin the rankings. A solid number six-rated department would reach the top three if we looked at just European banks, for example. Unsurprisingly, we jumped up to number one often and he had T-shirts printed for us all. He climbed the management pole quickly after that. And I know of at least one bank that even paid for bespoke rankings tailored to include only its client list.
The first-quarter investment bank earnings season will be upon us soon and I expect we will hear more about market shares and league tables — who is winning market share this year, over the past three years or from some arbitrary starting point they choose. Those banks that are perennial market share losers will highlight a few selected areas where they are making investments and hope to close the gap, with some consulting jargon to back it. Credit Suisse was particularly adept in the presentation of its market share and league table statistics in the years before its demise.
In one popular industry survey in foreign exchange markets, rankings seemed to not always reflect actual revenues generated. Some institutions always seemed to do better than those with huge payments networks and larger foreign exchange revenues, such as Citigroup. And, more generally, the number of investment banks claiming to be in the top five in a particular area is sometimes more than five.
For instance, at its recent investor day Barclays’ own analysis estimated that it was the joint number five in markets in client market share and joint number four in fixed income instruments, currencies, and commodities (FICC). It generated 2023 revenues of $6bn in FICC and $9bn for markets overall. The smallest of the big five US banks generated almost twice as much in markets revenues, a huge gap. As well as the big five US banks, Deutsche Bank made $8.6bn of revenues in FICC in 2023, also a significant gap.
Banks that are touting market share gains over the past three years in securities trading should be careful not to expect another major competitor to implode like Credit Suisse. At least we know who is going to be the number one Swiss-owned investment bank from now on.
More broadly, comparisons between investment banks made on a revenue basis — and some league rankings — often overlook non-bank competitors and adjacent growth markets such as private credit. In market making the largest non-bank firms Jane Street and Citadel Securities together generate almost $20bn of annual revenues, making them as large as many investment banks’ trading desks.
This raises an issue not only about league tables but the evolution of Wall Street. Jane Street’s dominance in the fast-growing and huge exchange traded funds market is a case study of banks not focusing enough on adjacent markets and doing too little, too late. This is not just an opportunity cost of missing out on the next big thing but allowing a Trojan horse to be created that is now aggressively attacking the core credit trading franchises of banks.
In a similar vein, Citadel Securities was always seen as a retail market maker in cash equities and equity options but has made huge strides in the institutional market, leveraging existing technology, talent, knowhow and flows. In FICC, it trades much like banks, offering liquidity of trade in and distributing prices to the buy side through platforms such as Bloomberg. It is the market leader in US Treasuries trading.
Here’s the thing for the big banks: they need to grow the pie by building and scaling new business lines early in adjacent spaces. That has been a traditional Wall Street strength with investment banks mutating to capture new profit streams. Look at Goldman Sachs and Morgan Stanley in prime brokerage over four decades.
But investment banks have reacted to the difficulties of increasing capital and regulation since the financial crisis by focusing on a zero-sum war of attrition with each other in existing business lines. JPMorgan has been a clear winner. Goldman Sachs remains a top dog across the board, which is reflected in its profitability.
But in general, the investment banks have left open the door for competitors in new areas, not least the huge rise of the private capital industry. League tables portray the state of play in existing businesses, less so growth through innovation. Given the bragging rights they confer, they are unlikely to go away but maybe less focus on them is healthy.
