Morning Coffee: Credit Suisse’s finest trading talent unwanted by UBS. Carlyle wants to build its investment bank
It might be that only a small number of bankers will understand the true significance, but the end of an era is upon us. As part of the integration between UBS and Credit Suisse, UBS will switch off the Credit Suisse “Crossfinder” trading system.
It's a cautionary tale about how fragile even the greatest of franchises can be.
If you remember dancing to “Dynamite” on a Friday night after the market closed, or went with a client to the premiere of Inception, you won’t need to be reminded – in its day, Crossfinder was one of the biggest “dark pools” in the equity market. It allowed big institutions and hedge funds to electronically match trades with each other and get better prices than anyone was quoting on the stock exchanges. It was part of a suite of Credit Suisse products collectively known as “AES” (Algorithmic Execution Services), which were at times so dominant that people actually wrote books about how difficult it was to compete against them.
A position like that ought to be very difficult to lose. Trading is famously an industry where market share is self-reinforcing, and a system like Crossfinder ought to be the perfect example of that kind of economics; the more clients you can connect to the system, the more likely they are to find a match for their trades, and the more valuable the system is to them. All you need to do is to take some of the profits you’re making and reinvest them into ensuring you’re staying ahead in the technological arms race to provide faster and more reliable connections.
It is indeed difficult to lose a top position but as has CS proven, it’s not impossible. There were regulatory fines, which didn’t help, and the failures and losses elsewhere in the bank made it difficult for management to justify the level of investment that the electronic trading franchise needed. People left, systems got a little bit older and Credit Suisse gradually stopped being the first choice. Then came the events of March 2023, which caused a lot of trading desks to simply remove Crossfinder from the menu; between January and May this year, the system lost 70% of its remaining volume.
So it looks like the decline of Crossfinder was really caused by the same factors as the decline of the overall Credit Suisse equities franchise, and indeed of the bank itself – years of mismanagement and underinvestment. In fact, if you want to find the Credit Suisse equities business, it’s arguable that the best place to look is at Barclays. Steven Dainton, the former CS banker who is Global Head of Markets there, has recruited many of his former colleagues, including Nas Al-Khudairi, the head of electronic trading products who was largely responsible for the success of Crossfinder. Anyone who stayed at Credit Suisse to work on what was once the finest trading system on the market is presumably now unwanted.
The lesson is particularly vivid here, but it’s the same one that banks have failed to learn again and again in nearly every segment of the industry. Managing an investment bank is the art of holding on and bearing the pain until the good times come back. If you stop believing in a franchise, or lose the ability to give it the investment it needs, you might as well cut it entirely and save yourself a long and painful process of decline. And on the other side of the table, if you’re working for a market leader, it’s a good idea to check up from time to time that the people in charge are still investing in keeping its position.
Elsewhere, although the biggest incumbents have been cutting jobs so far this year, there seem to be no shortage of other players who think that the investment banking industry is worth growing in. Harvey Schwartz, the CEO of Carlyle Group, has noticed that his firm pays as much as $1bn of fees to the Street per year, and has set an internal team working on strategies to see whether it can save a proportion of that cash by increasing the size and scope of its own internal capital markets unit.
At present, Carlyle’s capital markets group appears to be genuinely an internal service centre, helping raise funds for portfolio companies. But it’s easy to see how it could start taking a share in IPO distribution, or providing M&A advisory services, and even in the fullness of time start competing on the open market. It seems odd to think of a private equity firm owning an investment bank – would they start poaching their own associates? But even if it stays internal, it’s a few more job opportunities for capital markets bankers being let go elsewhere.
Writing marketing material and summarising broker reports are apparently the main uses that money managers have found for ChatGPT, according to a survey. There surely ought to be some prize for the first enterprising research team to put an “exploit string” into a research note. (Bloomberg)
Michael Daffey, a former Goldman partner who is now chairman of Mike Novogratz’ crypto firm Galaxy Digital, has started work on the “thorough physical and spiritual makeover” required by his new house (it was formerly Jeffrey Epstein’s place). (Daily Mail)
Congratulations to JP Morgan’s Bournemouth office, where 250 volunteers have made 1000 beeswax candles over a period of 24 hours, to be sent to help Ukrainian families during power cuts. (Bournemouth Echo)
The perfect present for an investment banker who has nearly everything else, is a big fan of 2010s nostalgia and doesn’t mind being the subject of a few patronising glances. The Lamborghini driven by Leonardo di Caprio in “The Wolf Of Wall Street” is up for sale, with an estimated value of $2m (Bloomberg)
If you’ve ever wondered where the office fitness bore gets his endless supply of diet and workout information from, it’s probably this podcast. (New York Times)
It might contain tips on growing and caring for garden hedges, or it might have advice on how to stop people speculating about whether you’re going to run for office. It will surely have a long explanation of how all the problems at Credit Suisse are definitely due to mistakes made after 2020 – Tidjane Thiam has a book deal. (BookBrunch)
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