The rise of quant-driven hedge funds, recent advances in technology and new regulations have taken a heavy toll on people working in cash equities at investment banks over the last several years. The bad news is that things are bound to get much worse, unless of course you work at one of a handful of firms.
It’s no mystery that the traditional high-touch sell-side brokerage model is perilously close to becoming extinct. U.S. cash equities commissions fell by 50% between 2009 and 2017, according to a new report from McKinsey & Co. Then there’s the effects of MiFID II, which has contributed to a 30% decrease in equity commissions in Europe in 2018 alone. Though the regulations aren’t applied in the U.S., McKinsey says similar pain points are being felt. Hedge funds and investment managers are “unbundling” even though they’re not required to.
Still, there is some hope left for those working in cash equities and research, though the transition will be painful for many. McKinsey believes investment banks that aren’t at the top of the market will be consolidated or eventually exit cash equities altogether, leaving only a select few to soak up all the remaining business. Those that remain will be the banks that have been hiring and empowering high-end coders rather than traditional sales and research staff, according to the report.
“It is no coincidence that the three leading sell-siders increased their cumulative cash equities revenue share among the top ten firms by almost seven percentage points between 2014 and 2016; and it is reasonable to expect that they will continue to put space between themselves and the rest of the pack,” the authors wrote.
So which investment banks will be left standing following the cash equities apocalypse? McKinsey isn’t saying, but the list would likely begin with Morgan Stanley and Goldman Sachs, the two firms currently sitting atop the global equities league table. Analysts from Buckingham Research predict the two banks will only widen their lead, noting they should be “outsized beneficiaries” of equities strength in the fourth quarter of 2018.
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