Creditflux
Brokers: Welcome to the new Street
Monday, March 30 2009
Wall Street and Canary Wharf are dead. Full-service investment banks are broken. And credit sales people are flocking to a new tier of firms. Laura Jones meets the key players
Rarely has a great industry declined so fast. It was not just the demise of Bear Stearns and Lehman Brothers last year that marked the end of a particular age for the financial markets. It was also the dramatic fall in risk appetite at the remaining “bulge-bracket” firms and the wholesale exodus of staff.
Many sales people and traders have headed out of “Wall Street”. They’ve ended up in a different kind of firm. At these smaller outfits, the focus is on matching trades through good relationships and research, without taking principal risk. In other words: brokerage.
Some of these firms are still market makers rather than pure execution specialists and may selectively use their balance sheet. But they hold a fraction of the positions that the top-tier investment banks held and there are no prop desks. As a result, they argue, there are none of the conflicts of interest that plague larger dealers.
“A huge amount of trading in credit instruments has migrated from large dealers to smaller firms of one kind or another,” says Barry Goldenberg who, as sales and marketing director of data software provider Codestreet, has close links with many such firms.
The landscape of the new credit intermediary business is confusing. Firms describe themselves in many ways, though rarely do they call themselves a broker. We have grouped them into four categories.
First, there are the boutique investment banks, the likes of Jefferies and RW Pressprich. They have always made markets in credit instruments, though without the capital resources of the bulge bracket investment banks. Their inability or unwillingness to become arrangers of CDOs of ABS or loan syndication specialists over the past decade has turned out to be a blessing. Now they can draw on their experience and gain market share in corporate and other credit bonds.
The second category consists of established brokerages that are expanding into credit. In a few cases, these firms have long been active in fixed income. Other equity specialists, such as Evolution Securities, are moving into credit.
Asset managers turned brokers is the next category. There are only a handful of examples so far, such as Cohen & Company, of managers building up execution platforms. But a number of other specialist credit managers have indicated their ambitions to move in this direction.
We call the final category riskless start-ups. These are firms that have typically been set up by former bulge bracket officials. They are light on capital and heavy on relationships and product knowledge. Broadpoint and CapRok Capital are among the best known examples.
Many who remain at the large broker-dealers dismiss the switch to execution-only outfits as a flash in the pan. But the switchers feel differently. “The financial crisis means that the myth of the all powerful, all conquering large investment bank has been destroyed,” says Gary Jenkins, head of credit research at Evolution Securities in London.
Annaly Capital Management
Headquarters: New York
Type of firm: asset manager turned broker
Products covered: CDOs
Credit staff: unknown
Through its subsidiary Fixed Income Discount Advisory Company (Fidac), Annaly Capital Management has recently emerged as a leading agent for liquidations of CDOs and asset-backed securities.
By early last month, it claimed to have carried out 44 CDO auctions since the beginning of 2008. It is also developing a web-based platform for these auctions.
Although Fidac is separate from Annaly, which is a New York Stock Exchange-listed reit, the management team for the two firms is the same. They are led by chairman Michael Farrell and chief investment officer Wellington Denahan-Norris. Annaly’s asset management activities focus on US residential mortgage-backed securities.
Broadpoint
Headquarters: New York
Type of firm: riskless start-up
Products covered: high yield bonds, investment grade bonds, distressed bonds, convertibles
Credit staff: 75
Broadpoint started two years ago and describes itself as a full service investment bank. Its credit arm came over from the Bank of New York last year; it focuses on high yield credits and distressed bonds.
Executive managing director Joe Mannello specialises in high yield and high grade corporate bonds and convertibles and oversees the fixed income division, which operates on a riskless basis. Riaz Haidri and John Hale co-head credit trading.
Gregg Sullivan is responsible for credit sales and Michael Rowe for credit research. The overall credit team numbers 75; 65 are registered professionals.
BTIG
Headquarters: New York
Type of firm: established brokerage
Products covered: investment grade, distressed debt, asset-backed securities/mortgage-backed securities trading
Credit staff: unknown
Institutional broker dealer and fund services company BTIG traditionally specialised in equity trading and related brokerage services. It announced its expansion into fixed income in February. It was founded in 2002 and has more than 200 employees.
Jon Bass (ex UBS) and John Purcell (ex Citigroup) are the co-heads of global fixed income, which is focused on sales and trading of credit products, from investment grade bonds to distressed debt.
BTIG is creating a team to expand into asset-backed securities/mortgage-backed securities trading and is looking to build an emerging markets platform. This expansion in credit trading means 60 employees will be added in the coming months.
Cambridge International Securities
Headquarters: Westport, CT
Type of firm: established brokerage
Products covered: corporate bonds, emerging markets, mortgage/ABS
Credit staff: 18
Cambridge International Securities was set up in 1994 by the managing principals, Kate Buckley and Bill Weber.
Buckley (ex Lehman Brothers and SG Warburg) is a native of London and specialises in multi-currency credit and foreign government bonds. Weber (ex JP Morgan) specialises in corporate credit in all major currencies.
Cambridge views itself as a premier institutional boutique broker/dealer. Initially, it specialised in international bonds; now it trades credit and government bonds across many markets (including US corporate, international corporate, emerging and mortgage/ABS). In all sectors Cambridge is an active trader of non-US dollar bonds, working regularly in both European and Asian markets. Although it maintains a significant balance sheet, it concentrates on riskless trades.
Key people in the credit team include Jay Rubloff, Richard Wagle Jamer Breene and Curtis Gadow, who have been with the company for over a decade.
Newer additions include Holt Price, Jeff Barker, Jill Scalisi (who were previously at Lehman Brothers), Kelly Saltzgaber (who is ex Barclays Capital), Shaker Sundaram (ex UBS) and Mike Pacilio (Greenwich Capital).
Cantor Fitzgerald
Headquarters: New York
Type of firm: established brokerage
Products covered: ABS/MBS/CMBS, hybrid securities, distressed debt, corporate bonds
Credit staff: unknown
Cantor Fitzgerald has been around for over 60 years and started life as a brokerage service for Wall Street’s fixed income dealer community. It spun off its inter-dealer voice brokerage business as BGC Partners in 2004. The remaining business is active in a number of credit products, including mortgage-backed bonds, corporate bonds, distressed debt, CLOs, high grade corporates and asset backed securities.
CapRok Capital
Headquarters: New York
Type of firm: riskless start-up
Products covered: structured credit, MBS, CMBS, ABS, corporates including investment grade and high yield bonds, leveraged loans
Credit staff: 17-18
New York-based CapRok Capital describes itself as an adviser and broker-dealer with a full service institutional platform. It was launched 18 months ago as an advisory firm and blossomed into a fully fledged boutique investment bank.
The firm was founded by Rick Caplan and Joe Lizzio, former heavyÂweights in credit at RBS Greenwich and Citi respectively. The firm has hired around 40 professionals to-date, expanding rapidly by hiring former bulge-bracket employees.
The firm covers all fixed income products, including agency bonds, MBS, ABS, CMBS, structured credit, corporate bonds and leveraged loans, and has recently expanded into equities. All its trades are done on a riskless basis.
So far the firm is based out of New York, but there are plans to expand, with other offices to be added in the US and abroad, starting with the UK.
Cohen & Company
Headquarters: New York/Philadelphia
Type of firm: asset manager turned broker
Products covered: ABS, MBS, corporate bonds
Credit staff: Unknown
Cohen & Company Securities is the institutional broker-dealer arm of Cohen & Company, the CDO and credit hedge fund manager whose chief executive is Chris Ricciardi.
Set up in 2008, the broker-dealer business focuses on credit products and has recently made several hires.
Barry Mohr is the head of trading, managing director and co-heads capital markets. He was previously at Keefe, Bruyette, & Woods. Sharif Anbar-Colas (who was previously at UBS) joined as managing director, global head of CLO trading and head of European ABS trading.
David Hinton (who was at Credit Suisse) was taken on to specialise in corporate debt sales. Peter Nason joined as an institutional corporate debt securities sales executive. Caroline Jennings (ex Barclays) is now in institutional mortgage securities sales. Blake Murphy has joined the firm’s institutional mortgage securities sales team, alongside Tom Murray, Elaine Pang and Maria Palermo.
Dinosaur Securities
Headquarters: New York
Type of firm: established brokerage
Products covered: ABS, MBS, corporate bonds, municipal bonds
Credit staff: 20
Agency broker Dinosaur was founded in 2001. Since then it has been slowly expanding its credit brokerage, with several hires to a new structured credit platform.
The firm is pursuing institutional brokerage revenues through riskless matching of credit buyers and sellers, while also providing an esoteric risk advisory service.
The key credit brokers in the team include Marc Steinberg, who recently joined from Lehman Brothers, ex Luminent CIO Dimitri Papatheoharis who also joined the New York desk and, in London, ex Lehman structured credit trader Sreesha Vaman. The firm is headed by Glenn Grossman who is based in New York. The London office head is Paul Becker.
Three-quarters of credit traders still hoping for decent bonuses this year
Creditflux October issue
Sources say that as many as a quarter of credit traders may receive no bonus at all next year, and the other three quarters face an average decline in bonus of 50-70%.
However, the gloomy outlook does not cast its shadow over everyone, as certain areas look set to receive decent bonuses. Single name and options traders are likely “to get the lion’s share”, according to one ex-trader. Good performance could merit the same amount as 2007 or, more realistically, a 30% cut on that figure.
Structured credit traders however cannot expect to do well, say market sources. “On average, bonuses appear to be down 50-60% in all areas in credit,” says another market participant. “Correlation could see people 70% down, and those who have not performed being zeroed. We also expect there to be a much increased stock element to most bonuses.”
Russell Clarke, director of financial markets search consultancy Mantis Partners in London, says that despite a difficult year banks have strong P&Ls this year in some credit books. Provided they are not reversed in the fourth quarter, strong trading performances have been seen in options market-making on credit indices, single name credit default swaps and corporate bonds. Trading in investment grade financials has been particularly active, and has produced good P&L.
However, banks are unlikely to pass much of this on to traders in the form of bonuses. The mood therefore remains measured and at best expectations for 2008 payouts are 30% less than those seen in 2007.
A star trader would need to have a written deal, be lucky or be delusional to expect higher payouts this year than last, says Clarke. Most mid-level performing traders are expecting a 60% reduction in bonus. “The bonus pool in most banks is 50-70% down and will be retained by the senior layer across trading and sales, with modest payouts seen lower down,” he says. “The percentage of deferred stock awarded in the bonus structure will increase between 30% and 80%, set in longer vesting schedules.”
Sources say that as many as 70% of the HSBC credit trading floor will not receive a bonus. Barclays Capital, Goldman Sachs, UBS and Deutsche Bank have all said they will not be paying top executives bonuses this year.
Fallout from merger of banking giants hits credit teams
Creditflux September Issue
Bank of America senior distressed traders Evan Remmes and Nathan Held joined the desk in January, along with colleague Dan Bird. Held is a former Bear Stearns distressed trading head.