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By Olivia Oran
April 20 (Reuters) - Wall Street banks are piling intoequities trading and doing increasingly creative things to winover clients. But as competition heats up, the low-marginbusiness may come under further pressure.
The list of banks focused on growing equities spans bothsides of the Atlantic, including Citigroup Inc, UBS GroupAG and Deutsche Bank AG.
They are taking different tacks, with some focused purely onold-fashioned buying and selling of stocks, others onderivatives or exchange-traded funds, and others on primebrokerage or electronic trading. Some aim to do all things forall clients.
As newcomers try to gain ground, leading firms like GoldmanSachs Group Inc and Morgan Stanley are fighting tomaintain market share. The business already has razor-thinmargins, and rivals are trying to nab clients with aggressiveprices or new products, traders and analysts said.
"If everyone tries to grow equities, the economics aren'tgoing to be that great," said Guy Moszkowski, a bank analystwith Autonomous Research. "It's also not going to be easy."
The industry has set its sights on the business because itis a safe harbor under new capital rules and because clientdemand is fairly strong.
However, launching and growing this kind of businessrequires big up-front investments that can take years to recoup.It is impossible to tell whether banks are building equitiestrading profitably because they only report revenue from thebusiness, not earnings.
A veteran Wall Street executive said it would take a smallplayer at least five years to reach No. 5 or 6 in market share.The person, who was not authorized to speak publicly, said ittakes that long to recruit talent, build trading technology andattract investors with smart research and useful products.
Banks are trying to do just that.
Goldman, Morgan Stanley and UBS have created non-traditionalresearch teams that use tools like web-scraping technology,consumer surveys, social media, climate data, droids andsatellite imagery to provide unique analysis.
Such analysts might, for example, try to extract inventorydata from online retailers to gauge demand for Apple Inc's latest product. Banks hope such research will convinceclients to route more trading through them.
HUNT FOR GROWTH
The equities focus is part of a desperate hunt for growthacross Wall Street. After five-plus years of weak results, banksare lifting every rock to find revenue underneath. First-quarterresults underscored that trend.
Data from research firm Coalition shows why equities mayseem attractive: as industry-wide bond trading revenue shrank 36percent from 2010 to 2015, stock-trading revenue rose 23percent. During the first quarter, equities trading revenue fellat big banks but fared much better than bond trading.
"It's still tough out there," said Richard Johnson, ananalyst with research firm Greenwich Associates. "Fixed-incomehas been one of those areas that hasn't been doing well, socompared to that, other areas look better."
During last decade's bond-trading boom, some banks all butabandoned stock trading because margins were so thin. These haveonly shrunk since then. The average commission in U.S. marketsis now 2.64 cents per share, down from 3.2 cents in 2007,according to consulting firm Accenture.
Bank executives say the only way to make the business workis to trade very large volumes, focus on high-margin products,or do all of the above. High-margin businesses like derivativesand prime brokerage tend to be riskier and require more capitalbut are among the few places on Wall Street where profits arerising.
Banks are also keen on structuring liquid alternative funds,which hold various securities but trade like stocks, as well assmart beta products, which allow investors to create customindexes.
"Banks are looking at ways they can provide creative,differentiated products" that require as little capital aspossible, said Greg Berman, a managing director at broker dealerNorfolk Markets who previously led institutional equitystructuring at Deutsche Bank AG.
NO QUICK FIX
Although Wall Street has high hopes for equities trading, itwon't be a quick fix for profit problems.
Citigroup, for instance, has been investing heavily inequities trading. After reporting a 19-percent revenue declinethere in the first quarter, the bank's finance chief JohnGerspach, said he won't be able to judge success until earlynext year.
Goldman and Morgan Stanley, which compete for the No. 1 spotin equities, were not immune from ups-and-downs of the business,either. They reported equities trading revenue declines of 23percent and 9 percent, respectively.
European rivals may have to wait even longer to seeinvestments bear fruit.
UBS Group AG has focused on equities trading since2012, when it said it would largely pull out of bond trading.Despite leading in Asia and Europe, it has not yet caught up inthe United States, according to Coalition.
Deutsche Bank is only beginning to dive more aggressivelyinto stocks. It plans to hire around 100 people to boost theequities trading business, with an emphasis on electronictrading.
Meanwhile, Barclays is exiting much of its cash equitiesbusiness in Asia. Japanese bank Nomura Co Ltd isshutting down European equity operations. (Reporting by Olivia Oran in New York; additional reporting byDavid Henry; Editing by Lauren Tara LaCapra and Nick Zieminski)
