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Rupak Ghose is previously a financial research analyst at Credit Suisse and Head of Corporate Strategy at ICAP/NEX.
If Mark Twain were surveying Wall Street investment banks, would he say “Lies, damned lies and league tables”? My first job was on Wall Street more than two decades ago as a sell-side stock research analyst, and we were obsessed with league tables. We've been eagerly awaiting the release of our annual Institutional Investor Survey, and how we've fared to measure how much we've earned.
Thanks to the innovative zeal that bankers embrace when rewards are at stake, my boss has always managed to rotate the rankings. For example, a strong division with a rating of 6 would make it into the top three if we looked at European banks only. Unsurprisingly, we jumped to number one more often than not and he printed t-shirts for all of us. The driveshaft went up quickly after that. And I know of at least one bank that paid for custom classifications designed to include just their customer list.
Q1 investment bank earnings season is coming soon and I expect we'll hear more about market shares and league tables – who will win market share this year, over the last three years or from a random starting point they choose. Those banks that are consistently losing market share will highlight a few select areas in which they are making investments and hope to bridge the gap, with some advisory jargon to back this up. Credit Suisse was particularly adept at displaying its market share and league table statistics in the years before its demise.
In one popular survey of the industry in foreign exchange markets, it appears that ratings do not always reflect the actual revenues generated. It seems that some institutions have always performed better than those with large payment networks and greater foreign exchange earnings, such as Citigroup. More generally, the number of investment banks claiming to be among the top five in a given region sometimes reaches more than five.
For example, at Barclays' recent investment day, its analysis estimated that it was the number five entrant in the markets in terms of client market share and the number four entrant in fixed income, currencies and commodities (FICC). It generated 2023 revenue of $6 billion at FICC and $9 billion for markets overall. The smallest of the Big Five US banks had twice the market revenues, a huge gap. In addition to the five major US banks, Deutsche Bank had $8.6 billion in FICC revenue in 2023, which is also a huge gap.
Banks touting market share gains over the past three years in securities trading should be careful not to anticipate the collapse of another major competitor like Credit Suisse. At least we know who will be the number one Swiss-owned investment bank from now on.
More broadly, comparisons between investment banks made on the basis of revenues – and some league rankings – often ignore non-bank competitors and adjacent growth markets such as private credit. In market making, the largest nonbank firms, Jane Street and Citadel Securities, together generate nearly $20 billion in annual revenue, making them as large as many investment bank trading desks.
This raises an issue not only regarding the league tables, but also regarding the development of Wall Street. Jane Street's dominance of the fast-growing, massive ETF market is a case study of banks not focusing enough on adjacent markets and doing too little, too late. This is not only an opportunity cost of missing out on the next big thing, but it allows the creation of a Trojan horse that is now aggressively attacking banks' core credit trading privileges.
In a similar vein, Citadel Securities has always been viewed as a retail market maker in cash stocks and stock options, but has made huge strides into the institutional market, leveraging existing technology, talent, knowledge and flows. At FICC, they trade like banks, providing trading liquidity and distributing prices to the buy-side through platforms like Bloomberg. It is the market leader in trading US Treasury securities.
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That's the thing for big banks: they need to grow the pie by building new business lines and expanding early into adjacent spaces. That has been a traditional force on Wall Street as investment banks turn to new profit streams. Look at Goldman Sachs and Morgan Stanley in the brokerage business over four decades.
But investment banks have responded to the difficulties of raising capital and regulation since the financial crisis by focusing on a zero-sum war of attrition among themselves in existing lines of business. JP Morgan was the clear winner. Goldman Sachs remains at the forefront of companies across the board, which is reflected in its profitability.
But in general, investment banks have left the door open to competitors in new areas, not least the explosive rise of the private capital industry. Ranking tables depict the state of existing businesses, let alone growth through innovation. Given the bragging rights it gives, it's unlikely to go away, but perhaps less focus on it is healthy.
