Goldman, Morgan Stanley claw back hedge fund trading business from European rivals

Goldman Sachs and Morgan Stanley are winning back the trading business of hedge fund clients that they lost to European rivals during the financial crisis, as new capital rules spur banks like Deutsche Bank to scale down their businesses.

The two US banks together now have about 37 per cent of the market for trading with hedge funds and financing positions, known as “prime brokerage,” up about 6 percentage points from the end of last year, according to research firm Preqin.

The market share gains are fuelling stock trading profits at JPMorgan Chase & Co. as well as at Goldman and Morgan Stanley, and could be a bright spot when the companies post results later this month.

Prime brokerage is one of the few areas on Wall Street where revenue and prices are rising, even though competition is receding, executives in the business and analysts told Reuters.

“With the foreign banks backing away, it’s become a greener pasture for some of the US prime businesses,” said Larry Tabb, founder of financial markets advisory firm Tabb Group.

It’s a business which the US banks are marketing aggressively. Steve Boyd, founder of hedge fund Armistice Capital, originally used just Zurich-based UBS AG as a prime broker when he started the fund in 2012. Last year, a Morgan Stanley representative told him the bank wanted his business.

“We weren’t even looking for a second prime yet,” Boyd said. “They told us they were interested in investing in a relationship with us, and didn’t just want to work with us when it was highly profitable for them.” Armistice ended up giving some of its business to Morgan Stanley.