LONDON – HSBC Holdings is considering outsourcing part of its sprawling trading business as executives struggle to justify making technology investments needed to keep up with larger rivals.
Europe’s largest lender has held preliminary discussions about directing parts of its fixed income trading order flow to an outside market maker, according to people familiar with the matter.
The moves would allow HSBC to save millions of dollars in information technology costs associated with running trading desks around the globe, two of the people said.
HSBC is open to a deal with firms including Citadel Securities and Jane Street Group, the people said.
The deliberations within the firm are at an early stage and there is no certainty they will result in a deal, according to the people.
Spokespeople for HSBC, Citadel Securities and Jane Street declined to comment.
HSBC’s willingness to consider such a deal shows that even systemically important banks with huge Wall Street operations are struggling to make the necessary technology investments to properly compete in trading.
Citadel Securities, the market maker founded by billionaire Ken Griffin, has been developing the idea for such a trading service, Bloomberg first reported in July.
Under those nascent plans, the market maker would manage the guts of the trading desks – including technology, analytics and order execution – while banks would continue dealing with the customers.
Jane Street has also discussed offering a similar service with some banks, according to people familiar with the matter.
Such a tie-up would be the latest sign that even some of the world’s largest banks lack the scale needed to compete with the likes of Citadel Securities and Jane Street, let alone traditional rivals like JPMorgan Chase & Co, Goldman Sachs Group and Morgan Stanley.
Losing share
Both market makers are capturing a larger share of trades these days.
Citadel Securities, for instance, now handles more than a third of all listed retail stock trades in the United States.
Jane Street meanwhile accounted for 10.4 per cent of equities market activity in North America in 2023, up from 7.7 per cent the year before, according to documents.
Such so-called non-bank liquidity providers have more than doubled their share of the global markets revenue pool to 26 per cent in a span of just six years, according to a report from Boston Consulting Group.
Meanwhile, traditional lenders’ share of overall trading flows has been dropping.
European banks have been hit especially hard, with their share of global trading revenue falling by 10 percentage points over the last eight years to 29 per cent, according to Bloomberg Intelligence’s data set.
HSBC was among the worst performers over that time, the analysts found.
“European investment banks, notably Societe General and HSBC, need to cut costs to protect profit as they risk ceding more share of the US$167 billion (S$224 billion) trading-revenue market to US rivals,” Bloomberg Intelligence analysts Philip Richards and Uzair Kundi said in a note to clients.
Inside HSBC, executives like that a tie-up with Citadel Securities or Jane Street would likely allow them to offer clients better pricing on trades in addition to helping them cut costs, a key tenet of new chief executive Georges Elhedery’s plans to turn around the bank.
Still, they worry that it could undermine their ability to properly compete in certain areas, such as prime brokerage, which Mr Elhedery has earmarked as a key focus for growth, the people said.
For the market makers, landing a deal with HSBC would be a huge coup. At Citadel Securities, executives initially envisaged that such an offering would likely mostly appeal to mid-size banks that lacked any kind of scale to compete in the business at all.
Recent restructuring
Since assuming the top job in September, Elhedery has not been afraid to take an axe to many large businesses across HSBC’s franchise if they do not have the proper scale to compete or generate sufficient returns.
For instance, the company recently announced it will shutter all of its mergers and acquisitions and equity underwriting operations in the US, Britain and continental Europe.
“We are taking this reallocation of costs, particularly from two areas, ones where which are subscale and so materially don’t really make an impact,” chief financial officer Pam Kaur said on a conference call with analysts in February. “There are others where, in terms of profitability, they are not materially profitable, like we said on the investment bank.”
Investors have rewarded Mr Elhedery’s restructuring so far: HSBC shares have rallied more than 30 per cent since he took the helm. In March, they traded just shy of a record they reached back in January 2001. bloomberg
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