Large investment banks have failed to recognise the value of their execution divisions, according to Richard Balarkas, president and CEO of Instinet Europe. “If they did,” he comments, “they would divest the business.”
Were the banks to take this route, the scale of business that the banks’ execution arms represent would amount to multi-billion dollar enterprises, he claims.
“In some cases, these are businesses with global market share and global leadership,” says Balarkas. But they remain highly profitable minority businesses cocooned within the equities division, wrapped within the securities arm of a massive bank. According to Balarkas, there is a simple reason for this. “Investment banks are trying to lure clients in with as many different products and ideas as they can, because that’s how they think they will maximise revenues,” he explains. “It’s extremely blinkered.”
Balarkas says the global brokers’ strategies are dominated by investment banking culture, which means they do not necessarily invest in the right places at the right time or pursue particular initiatives with single-minded focus. He believes the credit crunch has exacerbated this problem; he contends that the banks’ profitable execution arms have been forced to share in the pain of redundancies and swingeing budgetary cuts.
“I didn’t know the credit crunch was going to hit as hard as it did,” he says. “It’s obvious that people are going to be subject to top down aggressive budget cuts, top down aggressive headcount cuts… and they apply to everyone. It makes no sense.”
Investment banks are trying to achieve two opposing goals. The sub-prime crisis has forced them to try and make up lost revenue by maximising order flow through their internal dark pools. But at the same time, they must also try to achieve best execution for their clients, which can involve routing orders elsewhere. “If I get an order and I end up trading away outside of the Instinet dark pool, that doesn’t bother me. And that’s the difference, because a trade-through for an investment bank would be a sign of failure,” Balarkas says.
Those left running the investment banks’ execution business are “essentially in a compromise position”, he adds.
This is an extract from a larger interview with Richard Balarkas. For the full interview, see the Q2 2008 issue of The TRADE.