Biggest U.S. Banks Expand Trading Dominance Over European Rivals

(Bloomberg) -- As the coronavirus helps the big get bigger across industries and regions, a trio of U.S. banking powerhouses is seizing market share from European rivals in trading revenue.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley captured almost 46% of the global market for trading stocks and bonds in the first half of 2021, an increase of nearly six percentage points from the same period in 2019, according to data compiled by Bloomberg. By contrast, the portion of the market commanded by European lenders fell to about 32%, a decline of roughly four percentage points, with firms such as Deutsche Bank AG and HSBC Holdings Plc ceding ground.

America’s biggest financial institutions are building on their gains with huge technology budgets and their equity market dominance, which allowed them to benefit when the pandemic sparked the most volatile period on record. The U.S. banks have been encroaching on European territory for more than a decade, after rebounding more quickly from the 2008 financial crisis courtesy of cost-cutting and regulation aimed at reining in risk.

“In times of uncertainty over the last year and a half or so, the big players have been able to step up,” said Barclays Plc analyst Jason Goldberg. “The biggest U.S. banks have been able to capture more than their fair share as they leverage both relationship and technology. I don’t see them going backward.”

The U.S. trio has been adding market share since at least 2017, according to the data, which compared revenue from 12 U.S. and European banks for the first half of each year. The biggest jump came between the first six months of 2019 and the same period in 2020, when they captured almost five more percentage points, bringing their combined share to nearly $40 billion.

At the top of the list was Goldman Sachs, which has increased its overall share of the market by more than five percentage points since 2017, the most of the 12 banks. 

The Wall Street giant was able to snag more of the pie as it amped up technology investments and emphasized relationships with individual clients over single transactions, according to Marc Nachmann, who helps lead the trading division at New York-based Goldman Sachs.

“We’ve made a conscious decision to invest in technology in lots of parts of our business,” Nachmann said in an interview. “It becomes a scale game. You have to be able to afford to keep up with the technology spend to be one of the top performers.”

Goldman Sachs invested $4 billion in technology in 2019, according to a presentation that year. JPMorgan has been increasing its investments, and has a $12 billion annual tech budget overall, including for its retail operations. Morgan Stanley’s Chief Executive Officer James Gorman said in June that its tech budget is well over $4 billion.

Back to Normal

Wall Street’s biggest banks raked in massive hauls from trading as the pandemic roiled markets and the Federal Reserve’s rescue measures bolstered asset prices. But the string of banner quarters waned in the three months through June, following warnings by bank bosses that activity would normalize. As banks gear up to report third-quarter earnings next week, investors will focus on whether that trend continues. 

One consequence of more normal revenue streams could be intensified rivalries over global trading, according to Bloomberg Intelligence analyst Alison Williams. 

“As things start to stabilize and some of that liquidity comes out of the system, there could be less activity,” Williams said. 

In Europe, Deutsche Bank saw the biggest decline in market share from 2017 through 2021, following its exit from the global equities business in 2019 in a sweeping restructuring. The company, which lost 3.1 percentage points in the five-year period, began clawing some of that back in first six months of 2021, when it recouped 0.8 percentage point.

Barclays Plc was the only lender surveyed in the region to pick up market share from 2017 to 2021, helped by its stronger foothold in U.S. capital markets.

U.S. lenders’ bigger inroads into the European market will probably soon give way to more incremental gains, a trend analysts attributed to politically disruptive issues such as Brexit as well as the over-banked nature of the market, with its lower margins.

Europe is “not a good hunting ground for banks in the global market,” said Tim Jennison, a partner at Boston Consulting Group. “I still think the American banks will continue to gain share -- if not as dramatic in Europe, then the market will continue to gain share in Asia.”  

There may already be signs of a return to pre-pandemic levels. In the first half of 2020, European banks had 31.6% of the market, and that barely changed in the first half of this year, the data show. U.S. banks overall even saw their share wane slightly, from 68.4% in the first half of 2020 to 68.38% for the same period this year.

“The European banks’ resolve to stay committed to investment banking has been amazing -- it’s remarkable, in light of the subpar returns and lost market share,” Mike Mayo, a bank analyst at Wells Fargo & Co., said in an interview. But for now, “Goliath is winning.”

©2021 Bloomberg L.P.