Posts tagged “prime brokerage”

FBR to Exit Prime Brokerage Business

January 7th, 2011

FBR Capital Markets is shuttering its prime brokerage unit, which the firm opened just 16 months ago, according to people with knowledge of the matter who were not authorized to speak publicly.

FBR had high hopes for the modest-size business, which started in August 2009. The company heavily recruited senior talent from Shoreline Trading, a Los Angeles-based firm, including Michael J. Murray and Matthew W. Ventura, who were brought on as managing directors. The unit was a “mini” prime brokerage operation, mainly servicing the trades of small hedge funds.

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In the wake of the financial crisis, some of the largest prime brokerage firms dropped their smallest clients. According to analysts, FBR opened its prime brokerage unit to take advantage of the turnover. But they said it struggled to find traction and significant scale in the market.

“The prime brokerage industry is very competitive, especially for prime brokers, like FBR, who service smaller and midsized hedge funds,” said Josh Galper, a managing principal at the Finadium Group, who expects more consolidation in this space.

FBR declined to comment on the closing of its prime brokerage unit.

According to Mr. Galper, hedge funds have also used less leverage in the last two years, resulting in fewer trades and profits for prime brokerage firms.

The silver lining, says Devin Ryan, an analyst with Sandler O’Neill, is the unit never became a significant business, so its disappearance will barely dent the company’s bottom line. The majority of FBR’s revenue comes from its investment banking and sales and trading businesses.

“Ultimately for them, it’s so small it doesn’t move the needle in a major way, it wasn’t something that was generating significant revenues,” Mr. Ryan said. “FBR quickly figured out, it wasn’t going to be a meaningful driver.”

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Nomura Loses Prime Brokerage Head

December 20th, 2010

By Nisha Gopalan (Wall Street Journal)

Just as global hedge funds are ramping up in Asia, Nomura Holdings Inc. has lost its top person for running the prime-brokerage business that banks use to service the industry’s needs.

Tim Wannenmacher, Nomura’s global head of prime services, has resigned, a person familiar with the situation said Friday. Nomura hasn’t announced a successor.

Mr. Wannenmacher, who was based in Hong Kong, resigned for personal reasons, the person said. It wasn’t clear immediately where he’ll be going. Mr. Wannenmacher was previously at Lehman Brothers, and moved to Nomura when the Japanese bank took over the collapsed Wall Street bank’s Asian and European operations.

Prime brokers provide a wide range of services to hedge funds, including helping them set up and trade shares.

Mr. Wannenmacher’s resignation comes as global hedge funds try to beef up their presence in Asia. Billionaire financier and philanthropist George Soros opened a Hong Kong office for his Soros Management Fund LLC fund in November and D.E. Shaw is moving one of its six executive committee members to Hong Kong from New York.

Nomura hasn’t had a high-profile defection since earlier this year, when several former Lehman bankers left after two-year-guaranteed bonuses dating back to the takeover of the U.S. bank’s regional operations in late 2008 expired.

Those departures included Sigurbjorn “Siggi” Thorkelsson, Nomura’s head of equities for the Asian-Pacific region, who’s since gone to Barclays PLC; Thomas Siegmund, its co-head of fixed income for Asia outside Japan, who left for UBS; and Colin Banfield, Nomura’s joint head of investment banking, who moved to Citigroup Inc.

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Madoff Trustee Picard Fires at Citigroup

December 10th, 2010

Battle stations! Picard opens fire on Citigroup

Irving Picard is a man engaged in battle. After unleashing over 100 lawsuits to claw back funds from facilitators of Bernard Madoff’s Ponzi scheme, Picard has opened fire on seven more banks, including Citigroup and France’s Natixis.

All of the suits seek the return of transfers from Bernard L. Madoff Investment Securities to various Madoff feeder funds. Of the more than $1 billion the receiver is seeking, the two banks account for $825 million.

“Armed with considerable non-public information about Madoff, Citi either knew or should have known that Madoff’s investment advisory business was a fake, and that funds Citi received from these two Madoff feeder funds came from Madoff’s fraudulent activities,” Picard said. “Evidence of awareness of the fraud is clear.”

Nonsense, Citi retorts. The bank will “vigorously defend against these claims by the trustee, as they are without merit and entirely untrue,” it said in a statement. “Citi did not know about nor in any way assist in the Madoff fraud.”

Picard is seeking $425 million from Citi, mostly as a result of a $300 million credit facility it offered a Rye Investment Management fund. The receiver sued Rye’s parent, Tremont Group, on Tuesday.

Picard’s team also didn’t mince words about Natixis, from which it is seeking at least $400 million.

“Armed with knowledge of many badges of fraud, Natixis and its related entities nevertheless provided substantial momentum furthering Madoff’s Ponzi scheme, especially in Europe,” Mark Kornfeld, a lawyer working for Picard, said. “Over time, this international collaboration became critical to sustaining the fraud.”

Piacard is also seeking more than $320 million from Fortis’ prime brokerage, more than $270 million from ABN Amro, about $45 million from Banco Bilbao Vizcaya, at least $35 million from Nomura Bank International and at least $16 million from Merrill Lynch International.

“Although many of these banks questioned Madoff’s trading strategy and returns, they continued to structure transactions seeking to exploit Madoff’s consistent returns,” another Picard lawyer, Ryan Farley, said.

The seven join a roster of many prominent banks sued by Picard. The reciever is seeking $9 billion from HSBC, $6.4 billion from JPMorgan Chase and $2.5 billion from UBS.

Picard is facing a Saturday deadline to file clawback suits in the case. To date, he has collected some $2.6 billion for victims of the $65 billion Ponzi scheme and has filed lawsuits seeking the return of  about $35 billion.

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Hedge Fund Hotel Heartbreak: UBS Settles for $100K

November 22nd, 2010

The “Hedge Fund Hotel” wasn’t a four-star luxury palace where fund managers went to be pampered and spoiled, though we are sure such places do exist. Rather, it’s the term used for an arrangement conferring office space, technology and other services to hedge funds by a certain prime broker.  Now, Massachusetts has fined UBS Securities LLC $100,000 to settle a complaint the prime broker didn’t fully disclose its arrangements with hedge fund advisers.

UBS Securities, a unit of UBS AG. settled the allegations without admitting or denying wrongdoing, a spokesman for Massachusetts Secretary of the Commonwealth William F. Galvin said Thursday. UBS spokeswoman Allison Chin-Leong said, “we’re pleased to have resolved the matter.”

The case dates back to a 2002 inquiry into ABN Amro Securities LLC, a prime broker that offered an arrangement known as a “hedge-fund hotel.” UBS acquired ABN Amro’s prime brokerage business in 2003 for $250 million. Massachusetts’ Galvin said UBS didn’t enforce a requirement that its hedge-fund hotel clients disclose their arrangements with the bank to investors.

Prime brokers profit off spreads they charge hedge funds to finance trades as well as fees for clearing and other services. In a hedge-fund hotel, a prime broker provides start-up hedge funds equipment and other services to help incubate their business. But the arrangement can create conflicts unknown to the endowments, pensions, or other investors in the funds.

In a 2007 administrative complaint against UBS, Massachusetts’ Galvin accused the firm’s prime brokerage division of maintaining a quid pro quo with hedge-fund advisers, requiring them to meet benchmarks of profitability for UBS or ensure they don’t use other prime brokers.

In one instance, the 2007 complaint alleged, a hedge-fund adviser who refused to alter his trading strategy to meet UBS’ demand for greater revenue was no longer welcomed in UBS’ office space.

Galvin didn’t allege any investors were damaged by the practice.

The hedge-fund advisers are supposed to disclose their arrangements with prime brokers to investors, but Galvin contends UBS failed to enforce these disclosures even though it had a policy to do so. In settling the allegations, UBS agreed to retain an independent consultant to review its disclosure policy and monitor it for three years.

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UBS Prime Brokerage Expanding in Asia and U.S.

October 18th, 2010

UBS Hong Kong headquarters

Swiss bank UBS is growing its prime brokerage unit. It has hired 11 new employees in Asia in the last year, and has expansion plans in the U.S.  This is in addition to its London-based managed account business that stresses transparency and liquidity as compared to other alternative investments.

“We’ve bulked up our staffing and our resources in the region,” Stu Hendel, head of UBS global prime broking business, told reporters. Besides Asia, the UBS will try to increase its market share in the United States, where it currently ranks sixth, and will soon announce a top banker to head the Zurich-based hedge fund business, Hendel added.

Hendel had survived 18 years at Morgan Stanley, which ranks alongside Goldman Sachs as the top two prime brokers in the United States, joined UBS in July last year. “We have hired about 11 people in the last year,” said David Gray, head of UBS prime brokerage in Asia, adding the hires included specialists in areas such as information technology and law.

Singapore and Hong Kong are seeing an increase in hedge fund activity as global funds move to Asia, attracted by the region’s strong economic growth and lighter regulation at a time when Western countries are looking to tighten control over the industry.

Hendel said the bar to start a new hedge fund has gone up to $100 million in the United States from $25-$50 million before the financial crisis, and warned that smaller startups will find it hard to attract investor money. He said established hedge funds have not been forced to cut fees despite the noise around the issue even as the industry struggled to make double-digit gains in each of the last three years.

Hedge funds typically charge a management fee of 2 percent or sometimes more on assets — well above the fee charged by mutual funds — plus 20 percent of returns above a pre-agreed benchmark. But Hendel said fund of hedge funds managers are already facing investor pressure to cut fees.

“First it is going to hit fund of funds. I think it already has because of the added level of management and performance fees coming out of the relatively muted hedge fund environment,” he said. Hendel also warned that if European regulations change dramatically, hedge funds will move out of key money management centers in Europe such as London to places like Geneva and Asia.

“Some hedge funds have moved from the U.K. to Geneva and other places outside the main money centres but it is a trickle,” he said. “The whole regulatory environment is the huge elephant in the room when it comes to hedge funds.” France, Britain and the United States have been embroiled in a months-long dispute about a draft European Union law to tighten controls on hedge funds and private equity firms.

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The Russians Are Coming

September 30th, 2010

A major Russian prime brokerage is expanding its UK client base at a rapid rate, giving impetus to the view that emerging markets like Russia will continue to see unabated growth.  The brokerage, Otkritie Securities, owned by one of Russia’s largest banking companies, announced plans this week to double the number of hedge fund clients before the year ends.

Roman Lohov, chief of global markets and investment banking at Otkritie Bank and CEO of Otkritie Securities, acknowledged his firm has a queue of potential customers that will see the bank’s UK clientele increase from around 40 to 100 by 2011. Hedge fund assets in the company’s custody operation are also anticipated to double to $2bn within the same time period.

“We are building serious traction in Europe and expect to make rapid progress in the coming months,” Lokhov declared. “Our aim is to be the leading prime broker for emerging market hedge funds in the world.”

Otkritie is based in Moscow and London, and began its prime brokerage business only 12 months ago. It now has a complete prime brokerage operation in the UK, US, Russia and Scandinavia, and also provides execution services in several of the world’s emerging territories, including Turkey, Brazil, and the CIS. An execution service in India is slated to go live this October.

The firm has seized on recent opportunities, such as acquiring three of Russia’s crisis-plagued banks in a merger scheduled for October. It is continuing its ongoing aggressive hiring campaign and recently added a team of researchers from Credit Suisse Russia.

The emerging market’s growth has been boosted by excellent performance in Russia and Latin America.  Fund managers have taken note and are planning to capitalize on the industry growth. Only last week, Brevan Howard, one of Europe’s largest hedge funds, made public plans to initiate a new office in São Paulo, Brazil.

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Another Mini-Prime Brokerage Consolidation

September 16th, 2010

Earlier this year, Direct Access Partners LLC, an institutional agency-only brokerage firm, acquired the capital formation team of Channel Capital Group to beef up its new Global Prime Services operation. Now, DAP is continuing the industry-wide mini-prime brokerage consolidation by acquiring EFX Prime Services, formerly a division of First New York Securities. As a result of the acquisition, EFX Prime Services will no longer be a part of First New York Securities.

This second acquisition by DAP is aimed at providing hedge fund clients with an integrated capital introduction and capital raising platform, which the firm claims is a unique offering among correspondent prime brokers. DAP has offices in New York, Boston and Miami.

The deal integrates the EFX Prime Services team into Direct Access Partners including Brian Stutman joining as managing director, Andrew Saunders, who will lead the Capital Introduction program and, Geoff Webster who joins the Prime Operations Group.

“The addition of the EFX Prime team adds significant expertise, strong client relationships and a successful Capital Introduction program to our Global Prime effort,” stated Direct Access Partners CEO, Ben Chinea, in the release. “Working with our proven Capital Raising team, Direct Access Partners is optimally positioned to address the entire spectrum of hedge fund clients – including start-ups, emerging funds and established managers.”

Direct Access Partners Global Prime Services offers a single point of contact for both back-office operations and technology and allows clients to opt for either a single or multi-prime solution with what it considers as well-regarded custodians. Clients of the company are said to have access to various service offerings including multi-asset execution in over 100 global markets, independent research, corporate access, securities lending, capital introduction, capital raising and strategic business consulting.

This latest shakeout in the mini-prime brokerage industry follows closely on the heels of the closing of Lighthouse Financial in August.  Several Lighthouse Financial employees and consultants have been indicted by a federal grand jury in Oregon for mortgage fraud. Goldman Sachs Execution and Clearing LP, embroiled in legal proceedings regarding its role in the Bayou Group bankruptcy, is rumored to be up for sale.

Observers note that the biggest beneficiaries of the mini-brokerage consolidation are self-clearing brokerage firms and trading platforms, which are insulated from the continuing turmoil in the industry.

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Flash Trading

September 2nd, 2010

Stocks are normally traded on either exchanges or alternative trading systems (ATS). Orders to buy or sell are submitted at either the market (prevailing) price or at some specified limit price.  Once an order is submitted, an automatic matching process occurs – the order is paired to one or more standing orders, or waits for a satisfactory incoming order.  Since exchanges and ATS are linked in a national market system (NMS), orders may be paired with orders from other locations.  These orders are publicly announced on the exchange’s ticker, and thus are a source of supply/demand information to all market participants.

Flash trades are different – for a fee, before an order is sent from a trading venue (an exchange or ATS) to the NMS, it is briefly revealed (flashed) about 30 milliseconds in advance.  Why?  So that a trader at the local venue can have first shot at matching the best bid or ask. In this way, the local trader can capture the order before it is submitted to the NMS. This results in a flash trade. This practice, while once popular at the New York Stock Exchange, has recently been discontinued there – NYSE market specialists (specially-designated dealers) no longer benefit from an advanced peek at orders.  Instead, all NYSE participants get equal access to incoming trade order information. It explained that they forbade the practice because it wanted to level the playing field for all traders at the exchange.

However, flash trades play an important role at some other venues, especially ATS that compete with exchanges for order flow.  They utilize flash trades to draw volume away from the larger exchanges, and through trading fees realize increased revenue.

Flash trading raises public policy issues, since it gives special privileges – earlier access to order flow information – to a narrow market segment at the expense of the overall market. This sort of favoritism at its face seems to run counter to public policy and market efficiency. Market makers are less likely to post quotes without securing a trading priority, which tends to depress liquidity and the orderly operation of the market.  Another controversial aspect is that flash trading only benefits computer-driven trades, such as high-frequency trading systems, because the sneak-preview afforded by flash trading can only be exploited by a high-speed computer. Some observers predict a future where the financial markets consist solely of computers trading with other computers, while humans sit on the sidelines and cheerlead. One wonders what the source of job satisfaction will be under this scenario.

Flash trading reminds some people of the earlier, illegal practice of front-running – brokers trading for their own accounts with knowledge of their customers’ pending orders. For instance, if a broker noticed buying pressure reflected in his customers’ pending bids, he could buy shares before prices rose, and then sell out at the higher price once he placed his customer’s orders. A legal variant is called tailgating, in which a broker first places customer orders, and then trades the same stocks for his own account.

Currently, many venues have voluntarily suspended flash trading due to unfavorable comments from regulators and market participants, but without specific rules outlawing the practice, flash trading may return at any time, and may spread globally to less-regulated markets.

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Europeans Battle over Market for Clearing Services

August 16th, 2010

Europeans Battle

Big multilateral trading facilities, such as Chi-X Europe, Bats Europe and various dark pools, are threatening the very existence of European exchanges. The multilaterals are not regulated as exchanges, but provide broadly similar trading services. Together, they have traders asking whether there is any reason going forward for doing business on an exchange, where trading is more transparent and often more costly.

The exchanges can point out that they offer additional services, such as listing/delisting, information dissemination, and an independent arena for IPOs.  Nonetheless, European exchanges have seen their share of equity trading fall off over the last few years.  This has forced the exchanges to target other services, such as clearing, to do battle with their less-regulated rivals.

Prime brokerage post-trade services are potentially the most exciting opportunity for the traditional exchanges.  Robert Barnes, managing director of equities at UBS, said: “Clearing and post-trade models are priorities for exchanges and trading firms. The ‘user choice’ model for clearing will become the rule rather than the exception.”

Deutsche Börse is already there and wholly owns the main German clearing and settlement provider, while the LSE and NYSE Euronext are looking to change their clearing arrangements.

Michael Krogmann, head of Xetra market development, institutional equity, at the German exchange, said: “Deutsche Börse has never been just a national player in trading – we have always had a diversified revenue base. Cash trading only accounts for around 15% of our revenues; the majority of our revenue comes from our settlement and custody business Clearstream.”

In London, brokers believe the LSE is planning to open a UK clearing house after the exchange’s chief executive Xavier Rolet said in May that it was “reviewing” its relationship with existing clearing supplier LCH.Clearnet.

NYSE Euronext said in May that it was planning to terminate its contracts with LCH.Clearnet and invest $60m (€47m) in two new clearing facilities – one in London for derivatives and one in Paris for equities. Duncan Niederauer, the chief executive officer of NYSE Euronext, said at the time: “After an in-depth strategic review, we concluded that we should improve our clearing arrangements while maintaining our current regulatory relationships in Europe.”

John Romeo, a partner at consultancy Oliver Wyman, said the revenue potential in cash equities clearing was minimal but derivatives clearing was potentially more lucrative.

He said: “A possible move is for an exchange that owns a clearing house to buy an interdealer-broker and put the combined exchange-traded and over-the-counter volumes through the clearing house. There is strong business logic but successful execution will require dealing with two very different cultures.”

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DiRocco Rolls Out Securities-Borrowing Software

August 6th, 2010

Leave it to John DiRocco, legendary pioneer in the securities-lending arena, to find a way to save security-borrowers time and money. It is a new marketing system called BorrowMaster, and it automatically compares borrow rates from different prime brokers.  The breakthrough of this system is not the information itself, but rather how now it becomes a cinch to access and analyze.

DiRocco’s firm, HedgeSpeed Technology of Wilton, Conn., charges about $10,000 a month for the software package and technical support.

“With the exception of the largest multi-strategy funds, managers don’t have such tools to monitor lending rates of every block of stock or bond they want to borrow,” said DiRocco, formerly the chief financial officer at hedge fund giant Citadel Investment Group. HedgeSpeed’s software tracks the securities-lending market over time, so managers know immediately when financing costs go up or down. Managers often don’t keep track of rate changes, and are surprised when they get a higher-than-expected prime-brokerage bill at the end of the month.

For large hedge fund operations, BorrowMaster can help portfolio managers keep track of which traders are shorting which securities—a feature prime brokers don’t usually offer. Such information can be useful to a portfolio manager whose traders have separate P&L statements, so each trader can be charged appropriate borrowing costs. For a complete description of the system, visit http://www.hedgespeed.com/docs%5CBorrowMaster.pdf

HedgeSpeed is pitching the product to firms with at least $300 million under management, although the largest hedge fund operators already have similar capabilities in house.

To market BorrowMaster, DiRocco recently hired Chris Sotell, previously a fixed-income salesman at boutique brokerage Rafferty Capital. Sotell joined late last month as senior vice president and director of marketing.

HedgeSpeed, founded by DiRocco in 2005, also advises hedge fund managers on liquidity management and financing options. DiRocco first tried to market BorrowMaster in 2007, just as the credit crisis was unfolding, then postponed the effort. DiRocco believes managers will be more interested in the technology now because borrowing costs have risen since financial markets froze up.

DiRocco practically invented the notion of brokering securities-lending transactions between prime brokers and fund managers. In 1990, he co-founded London Global Securities, a stock-loan business backed by Greenwich, Conn., hedge fund operator Paloma Partners.

He is best known in the hedge fund world as the former chief financial officer of Citadel, which he joined in 1998 with a mandate to cut the Chicago hedge fund firm’s borrowing costs. He later became chief financial officer of Balance Asset Management, an event-driven manager that shut down in 2007.

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