The cash equities model is broken. An industry plagued by overcapacity and weak profitability can't cope with higher costs and lower volumes. Some investment banks are trimming equities headcount, when they really need to decide whether they should be in the business at all.
This is a market that has long been crying out for consolidation. The largest 10 investment banks control only half of the global revenue from cash equities trading. That's lower than in any other sales and trading business line, according to Deutsche Bank research. And the high costs associated with equity research erode revenue while contributing little in fees.
High upfront investment is another obstacle to making cash equities viable. Banks have to pour money into technology, as the rise of computer-driven trading makes the business increasingly commoditised, which in turn threatens margins.
A dire market backdrop may now force banks to confront these realities. Recent third-quarter numbers from the U.S. investment banks paint a picture of underlying revenue declines in equity-related businesses.
In Europe, the situation is particularly acute. The value of European shares traded on exchange has slumped by 20 per cent to €6.6-trillion ($8.5-trillion) for the year to date, according to data from Bats Chi-X Europe. Even the best performing funds are suffering redemptions amid frustration that stocks have returned close to zero on a 10-year view. There's also a shortage of new issues, which would otherwise feed secondary market activity. European equity capital market volumes are down by 31 per cent for the year to date, Thomson Reuters data show.
Yet management has typically been hesitant in its response to the problem. Deutsche Bank has mainly focused cuts on its Asian business. Barclays last week slashed its wider equities business by 10 per cent, with some cuts coming in cash equities. Nomura has gone further but is still clinging on. And the likes of UBS and Credit Suisse haven't made any major moves on equities headcount.
The real question for banks is whether they can stay the course in what is increasingly a scale business, or whether they should follow the lead of Royal Bank of Scotland or Italy's UniCredit – and exit altogether.