Posts tagged “prime brokers”

Ex-Goldman Prop. Trader’s Hedge Fund Picks Three Prime Brokers

March 1st, 2011

Azentus Capital, expected to be among the largest hedge fund launches of the year, has recruited a trio of brand-name prime brokers to handle its trades.

The Hong Kong-based hedge fund, founded by former Goldman Sachs proprietary-trading chief Morgan Sze, will use the services of his old firm, as well as those of Morgan Stanley and UBS, Reuters reports. The new fund is expected to debut in the second quarter with more than US$1 billion in initial assets.

Sze, who has been planning the fund since last year after Goldman decided to pull the plug on its prop. trading operations, officially left the firm earlier this month and registered Azentus with Hong Kong regulators a week ago. He is thought to be building a team of about 30 for the firm, including Roger Denby-Jones, former Boyer Allan Investment Management CEO, as chief operating officer, and at least four former members of his team at Goldman.

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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.

Source

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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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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TradeStation to Add Securities Lending to Its Prime Services Offering

September 21st, 2010

Taps Industry Veteran to Head Sec. Lending Department and Co-Head Division

New York, NY, September 21, 2010 – TradeStation Securities, Inc. (Member NYSE, FINRA, SIPC and NFA) today announced the hiring of Robert Sackett to start up and lead the securities lending department of, and co-head, its TradeStation Prime Services division.

“Securities lending services are a critical component of our plan to build a first-class prime brokerage offering to small and mid-sized hedge funds and other buy-side traders who can no longer receive important prime brokerage services directly from the large firms,” said Salomon Sredni, CEO of TradeStation Group, the parent company of TradeStation Securities. “We believe TradeStation’s position as a self-clearing broker-dealer serving this market allows it to offer a more compelling value proposition compared to other firms that cannot directly provide custody, clearing, settlement and securities lending and must instead rely on the large firms to which they introduce all of their accounts.”

“We believe Rob’s 15 years of experience and relationships in securities lending will allow TradeStation to compete effectively in a market that continues to see industry fragmentation and where small to mid-sized buy-side institutional traders continue to seek prime brokers capable of directly delivering to them basic, critical prime services,” added Lance Baraker, Senior Managing Director and co-head of TradeStation Prime Services.

Mr. Sackett is leaving his position of Managing Director at Citigroup Global Markets Inc. to join TradeStation Prime Services as Senior Managing Director and co-head of the division. He has over 15 years of securities lending experience at Citigroup and its predecessors, and has been a NYSE-approved Securities Lending Representative since 1995 and a NYSE-approved Securities Lending Supervisor since 2002. He is scheduled to begin his employment with TradeStation after the Thanksgiving holiday, following the expiration of his 75-day garden leave period with Citigroup. TradeStation Prime Services expects to begin offering securities lending services in the 2011 first quarter. For additional information about TradeStation Prime Services, please visit: http://www.tradestationprime.com/.

TradeStation Prime Services, a division of TradeStation Securities, Inc., was founded to serve the needs of start-up to mid-sized hedge funds, registered investment advisers, professional traders and asset managers who need quality prime brokerage services, including execution and clearance, securities lending, capital introduction, and “incubation” services. Clients are offered electronic trading and decision-support platforms, including TradeStation, to analyze their trading strategies and automate or manually place their orders, and may avail themselves of the firm’s NYSE floor membership, which allows it to execute trades on behalf of clients on the NYSE floor as well as in other market centers from its NYSE floor booth/outsourced trading desk. TradeStation Prime Services is located at 400 Madison Avenue, New York, New York.
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About TradeStation Prime Services, a division of TradeStation Securities, Inc.
TradeStation Securities, Inc. (Member NYSE, FINRA, SIPC & NFA) is a licensed, self-clearing securities broker-dealer and a registered omnibus-clearing futures commission merchant, and has memberships or similar approved status (as well as direct connectivity for both market data and order execution) with BATS Z-Exchange, Boston Options Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, International Securities Exchange, NASDAQ OMX BX, NASDAQ OMX PHLX, The NASDAQ Stock Market, NYSE Arca and NYSE Amex. For futures accounts, TradeStation connects directly (for both market data and order execution) with the CME Group, Eurex Group and ICE Group (U.S. and Europe) exchanges. TradeStation is a clearance member with DTCC and OCC for equities and options, serves its futures accounts on an omnibus clearance basis, and also introduces institutional equities accounts to J. P. Morgan Clearing Corp., as clearance agent. TradeStation Securities has offices in South Florida, New York, Chicago and Dallas, and an affiliated introducing broker (TradeStation Europe Limited) in London.

About TradeStation Group, Inc.
TradeStation Group, Inc. (NASDAQ GS: TRAD), through its principal operating subsidiary, TradeStation Securities, Inc., offers the TradeStation platform to the active trader and certain institutional trader markets. TradeStation is an electronic trading platform that offers state-of-the-art electronic order execution and enables clients to design, test, optimize, monitor and automate their own custom Equities, Options, Futures and Forex trading strategies. TradeStation Group’s other operating subsidiaries are TradeStation Technologies, Inc. and TradeStation Europe Limited.
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Forward-Looking Statements – Issues, Uncertainties and Risk Factors
This press release contains statements that are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this press release, the word “believe,” “expects,” “plan” and similar expressions, if and to the extent used, are intended to identify forward-looking statements. All forward-looking statements are based largely on current expectations and beliefs concerning future events that are subject to substantial risks and uncertainties. Actual results may differ materially from the results herein suggested. Factors that may cause or contribute to the various potential differences include, but are not limited to, the company’s new “TradeStation Prime Services” division, generally, including the planned new securities lending department, turning out to be less profitable, less successful, and/or more costly than expected, or resulting in unanticipated claims or liabilities against the company, as a result of (1) Mr. Sackett’s employment, and/or the securities lending department he is expected to head, not beginning or working out as planned and expected, (2) unanticipated start-up or development costs and expenses that are not offset or exceeded by expected revenues as and when planned (or at all), (3) the TradeStation prime services offering generally, and securities lending services particularly, not growing in appeal to prime services clients to the extent the company believes they will, (4) the failure of the company to make timely and quality enhancements to its trading platform, or to offer alternative platforms, which are believed necessary to attract prime services clients to use TradeStation to execute and clear trades, (5) TradeStation’s size and balance sheet being unacceptably small to mid-size and larger prime services clients (which are part of the market segment the company intends to serve) and third-party providers of credit, funding and inventory required for a successful securities lending department, and (6) the general unpredictability of operating results for a start-up business division, particularly given TradeStation’s lack of experience in offering prime brokerage services generally and securities lending in particular.

Contact –

William P. Cahill

President & Chief Operating Officer
TradeStation Securities, Inc.
954-652-7852

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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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Carbon Trading Coming to NYSE

September 8th, 2010

The European arm of the New York Stock Exchange is planning to export is carbon-trading business to North America and Asia through a joint venture with APX Inc.  The timing is perhaps not fortuitous, since the carbon-trading market seems to experiencing a fall from grace.

NYSE Euronext will combine its Paris-based BlueNext unit with APX Inc., a U.S.-based provider of trading technology, to broaden market offerings tied to renewable energy and emissions.  The new NYSE Blue joint venture will compete with offerings from IntercontinentalExchange Inc. (ICE) and CME Group Inc. (CME) in an emerging market whose growth has been partly stalled by the halt of efforts to enact cap-and-trade legislation in the U.S.

“We think the marriage of an infrastructure company, APX, with strong links to voluntary carbon and renewable energy markets, is going to give us a competitive advantage going forward,” said Brian Storms, chief executive of APX, who will take over as CEO of NYSE Blue.

Storms said in an interview Tuesday that he saw no chance of any U.S. cap-and-trade legislation this year, but that NYSE Blue could benefit from “evolving” state-level programs centered on renewable energy and region-specific programs like the Regional Greenhouse Gas Initiative.

China holds opportunity as well, Storms said, citing government plans to introduce cap-and-trade pilot programs in several cities; there, NYSE Blue would vie with ICE’s Climate Exchange, which maintains a joint venture in the country aimed at developing a new emissions trading platform.

Exchange operators have for years sought inroads to emissions trading, seen as potentially growing into one of the largest commodities markets in the world through government mandates.

Under such cap-and-trade programs, carbon-dioxide producers like coal-fired power plants would have their carbon emissions capped at a certain level by government-issued credits for allowances. Those that exceed their limits would have to purchase added carbon credits from producers whose emissions fall below their allowed amount.

Europe has had the programs in place for several years, but U.S. lawmakers have struggled to implement similar measures, creating a fractured landscape of regional cap-and-trade schemes and voluntary programs that have yet to yield much business.

ICE highlighted the potential seen in carbon trading by agreeing in July to pay $603 million for Climate Exchange Plc, adding the world’s largest emissions market operator to its portfolio of energy and commodity markets. CME secured regulatory approval in July to launch its U.S.-based Green Exchange venture as a standalone unit, and is seeking similar status in the U.K.

ICE has since scaled back the Chicago Climate Exchange unit it acquired in July in the continued absence of a U.S. carbon mandate, and BlueNext has delayed past plans to expand into the U.S.

“Given Congress’s inability or unwillingness to create a nationwide cap-and-trade program, at least for the next three to five years, most of the transactions that have the potential to be exchange-based are going to be in Europe,” said William Bumpers, head of climate-change practice for Baker Botts LLP.

Carbon markets backed by CME and ICE are seen benefiting from the products’ ties to other contracts linked to energy and commodities. NYSE Euronext CEO Duncan Niederauer said in a statement that his company would look to build on its constituency of listed companies and traders that carry exposure to environmental factors.

NYSE Euronext is contributing its ownership in BlueNext in return for a majority stake in the enlarged venture. APX shareholders, including Goldman Sachs & Co. (GS), MissionPoint Capital Partners and Onset Ventures, will get a minority interest in return for the APX business.

Francois-Xavier Saint-Macary, who signed on as CEO of BlueNext Sept. 1, will serve as European chief executive, Storms said. A U.S. CEO will be drawn from APX.

Terms of the deal, seen closing by year-end, were not disclosed.

Source

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JPMorgan Closes Down Proprietary Trading Desks

September 3rd, 2010

Paul Volcker

The recently-passed financial regulatory reform law is having its desired effect – banks are dumping their proprietary trading desks. The new law contains the Volcker rule, named for former Federal Reserve Chairman Paul Volcker, which restricts banks from proprietary trading and sets new limits on the size of private equity or hedge fund investments. In its wake, up to five JPMorgan Chase proprietary metals traders in London left the company this week, including former Sempra trader Tim Jones.

Earlier in the week, the bank told proprietary commodity traders — who bet on commodities with the bank’s own money — that their desk would shut down to comply with new U.S. banking laws. The bank will shutter its proprietary-trading desks and has notified those desks’ employees that their jobs are being cut.

Tim Jones, who headed the proprietary metals trading team according to sources, was a former managing director at RBS Sempra Commodities that was bought by JPMorgan in February of this year. Sources said the other four traders worked on Jones’ trading team.

JPMorgan joins a long line of banks/prime brokers that are changing their trading businesses to comply with the Volcker rule, part of a broader financial reform law that limits the extent to which banks can bet with their own capital. Goldman Sachs Group Inc for example, is looking at turning its proprietary equity trading unit into a hedge fund.

The latest move may increase concerns within banks that they could lose traders to hedge funds and trading houses that are not bound by the new rules.Banks have time to comply with the law, but many are eager to figure out how to deal with the business soon, before traders jump ship.

Sources did not say where Jones’ trading team was headed. A spokeswoman at JPMorgan declined to comment.

The departures are the latest following the takeover by JPMorgan of RBS Sempra Commodities. In July, JPMorgan cut between 40 and 50 commodity trading jobs to remove overlap at the firm. They were primarily from its energy trading arm with the majority of the cuts in London.

The bank’s commodity team is believed to have lost well over $100 million in a disastrous coal deal during the second quarter, traders dealing with JPMorgan said in June. The bank raised its commodity trading risk in the second quarter for the first time in nine months, but earned less from the sector as prices fell, the company’s results showed earlier this year.

JPMorgan agreed to buy RBS Sempra Commodities’ non-U.S. businesses in February, including global oil, metals, coal and European power and gas businesses. The acquisition was completed at the start of July. The $1.6 billion takeover gave JPMorgan physical access to new markets around the world, with 26 locations in more than 10 countries and more than 130 storage and warehousing facilities.

Source

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High-Frequency Trading

August 31st, 2010

High-frequency trading (HFT) is a means to manage rapid order flow to markets. High-speed computers at an HFT firm can submit thousands of orders at a time to exchanges using special algorithms. These orders are usually cancelled and replaced; it is estimated that only 10% of HFT orders execute.  This phenomenon occurs because HFT systems continually fish for smaller bid/ask spreads that may immediately trigger trades. If no trades are triggered, the order is cancelled. However, if such trades are triggered, the HFT firm jumps in by trading to capture the spread – it buys at the lower ask and simultaneously sells at the higher bid. This only works if both legs are transacted at the same time. Any delay in one leg will allow market prices to adjust to the new spread, and the HFT firm can lose money.  While the potential profit per share is very small (estimated between 1 and 2 tenths of a penny per share), when multiplied by high volumes and frequent executions, HFT can be a sizeable money-maker.

It is estimated that tens of billions in profits are realized annually through HFT. Participants include prime brokers, hedge funds, and independent investment firms. This high-stakes arena has seen brokers such as Goldman Sachs sue former employees for stealing HFT trading algorithms. Competition is so cutthroat that HFT firms actually try to physically place their computers as close as possible to exchanges and alternative trading systems (ATS) to reduce communications latency. Some go even further and pay to have their equipment in the same room as that used by exchange/ATS order-matching computers.  The reason for such heroic order transmission strategies is that a delay as little as 1/1000 of a second can mean the difference between arriving first (and thus executing the trade) or sitting in a queue with an open order.

Besides capturing a tiny profit per share on each successful trade, HFT firms can also generate cash flow via perfectly legal rebates from exchanges in return for the enhanced trading volume. With these incentives, it is not surprising that almost ¾ of U.S. stock trading volume is attributed to HFT programs.

Anything this lucrative can be expected to engender its share of critics. Some worry of increased volatility in response to breaking news.  Others feel that dealers, market makers and specialists cannot compete with customers since the latter group gets first shot at existing bids and asks. That’s because customer have a higher trade priority than do dealers – which actually makes sense since dealers are there to make markets, not monopolize them.  The problem is that the liquidity provided by HFT engines can be quickly withdrawn when news occurs or volatility reaches extremes, thus making the market-makers job much more risky in difficult markets.

HFT, sometimes referred to as black-box trading, would seem to remove the human element from trading. A mistake on the tape can lead to a flurry of HFT activity that can easily disrupt trading operations. If such activity causes rapid discontinuous downside movements, other customers may have any stop-loss orders bypassed and sustain a larger loss than anticipated.  The future of HFT is not clear – it will be interesting to see if the additional liquidity provided by HFT will compensate the trading community for possible downside risks.

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