A different world

IFR Awards 2023
10 min read
Rupak Ghose

Rupak Ghose looks back on a banking career in which it felt like everything changed, but some things remained the same.

As a kid growing up in London in the 1980s, there was the background of Thatcher, privatisations, and the emergence of the City. But these were still a lifetime away from the inner cities where I went to school.

There were no Continental coffee shops and rarely did you meet a parent at school who worked in the City. The glamour of financial markets was more evident from the imagery of Hollywood, whether it was the crooked hedge fund manager Gordon Gekko in "Wall Street" or the open outcry trading pits made infamous in "Trading Places" – still two of my favourite movies but alas unlikely to have been watched by the investment bank graduate class of 2023.

Summer 1998 was my first experience at the coalface of financial markets. Through some persistence and a lot of luck I managed to get myself onto the summer internship programme at CS First Boston. I had studied Asia at university, and someone thought I fit the bill as there was an emerging markets project on the trading floor.

I was surrounded by interns who had been to posh schools and then Oxbridge or Bristol universities. But the guys who hired me were a little different. One was an American proprietary trader who had just moved over from New York. The other was Lebanese French and had studied at one of those fancy Paris universities. I soon found out all the derivatives guys on the trading floor were French – many of North African origin – from similar schools.

When I interviewed for the internship, I was told how CS First Boston was number one in Russia and Eastern Europe, the fastest growing part of the trading business. CSFB had also just taken over Barclays equities investment bank BZW. Years later the Barclays Capital people would still use our gym and there would always be the uncomfortable moment when you noticed Bob Diamond on the treadmill next to you – how do you start up a conversation with a guy surrounded by gym instructors built like WWF wrestlers?

As an intern we would rotate around the desk, meeting the senior traders. The head of convertible bond trading gave us a presentation. His name was Michael Hintze, and I would hear that name again later in my career as he would go on to become one of the most successful hedge fund managers in the world, as the founder of CQS.

The first time I bumped into the head of European trading while waiting for the lifts he told me how the emerging markets project I was working on was important and how Russians had been the first people in space. Later in the summer he had to cut short a presentation to my intern group because his boss, global head of equities Brady Dougan, urgently needed to speak to him. Later I would read about the GKO crisis and how Russia had defaulted on its debt.

Back then the trading floor was one sprawling arena of mostly men shouting prices down the phones with clunky Bloomberg terminals on their desks. There was little distinction between customer business and the bank’s own balance sheet. My boss, the American proprietary trader, would attend the morning meeting listening to traders discuss client flow. They would sit on the trading floor and be able to listen as the orders came in. Our head of trading had hired some traders with proprietary trading experience to run the Russia desk – showing how important this desk was given the wide bid-ask spreads and opportunities to make arbitrage.

Fast forward to late 1999, when I joined CSFB as an equity research graduate trainee and things had already started to change. Research and eventually trading went from country focused to industry focused. The proprietary trading desk was in the process of moving behind a glass wall. The business was even more cosmopolitan – Americans, French, Italians, Germans, Spaniards – as was London. The British Empire may be dead but London was back.

Market structure emerges

In 2003 and 2004 I was one of the first equity analysts to cover the exchange and market structure space. Exchanges saw significant growth as the shift to electronic trading drove trading volumes. At CSFB, as it was known by then, I had a ringside seat as we were pioneers in cash equities electronic trading – first in the US and then in Europe. I also saw the shift of the business away from cash equities to derivatives and prime brokerage. Electronic trading drove CSFB’s market share but margins in cash equities started to collapse across the industry. The exchanges had wider moats, especially futures exchanges that had benefited from vertically integrated ownership of trading and clearing which meant natural monopolies and less pressure on fee levels.

A new type of trading was growing. Exchanges such as CME, Deutsche Boerse and LSE kept telling us that a large proportion of their volumes was now coming from new proprietary trading firms. Getting access to these hyper-secretive firms was difficult but I was able to channel check internally, as CSFB, like most large investment banks, also had a large equity stat arb desk running similar strategies.

The client base was changing as well. Long-only funds were backing away from equities. An increasing portion of revenue was coming from hedge funds. It wasn’t just the size of the hedge fund that mattered but the velocity of trading and leverage employed. The tiger cubs like Viking and Lone Pine and similar European firms like Lansdowne and Egerton were more like long-only firms. Marshall Wace and Walter Capital Management emerged in Europe and SAC in the US. SAC would buy out Rich Walter and SAC Europe was born just as other US firms like Citadel started expanding in Europe. This was the beginning of the multi-strategy pod-shop boom we face today.

Investment banks were fighting tooth and nail for market share. Exchanges were at the beginning of massive global and cross-product consolidation wave, and I got to be front and centre advising activists with my sellside analyst hat on. Consolidation makes sense in IT businesses. Not just getting rid of one corporate overhead but duplicated IT matching engines, servers and data centres. Unlike banks, which were hit with a huge surge in capital requirements after the global financial crisis, the exchange sector had high operating margins and low capital consumption. In June 2004, my first report on the sector was titled “Stock Exchanges – Cash Machines?”

ICAP years

One company I started to follow in 2003 was ICAP. Traditionally it was an interdealer broker where its clients were the FICC divisions of banks. It had grown with the boom in this space with particular strength in interest rate derivatives. ICAP had also consolidated the voice-broking business where there were scale benefits and network effects from size. My December 2003 initiation on ICAP and peers was called “UK brokerages – Liquidity, liquidity, liquidity”.

ICAP was run by inspirational and charismatic founder Michael Spencer. He was ahead of the curve in seeing the move to electronic trading in FICC but struggled to convince his brokers. In the end he embarked on a series of transformative acquisitions of bank-owned industry electronic trading platforms – BrokerTec in US Treasuries and repos and EBS in spot foreign exchange. ICAP also did acquisitions in the post-trade space ahead of time.

I worked for Spencer and the ICAP board from 2012 to 2018 primarily as head of corporate strategy and was at the coalface as we had to navigate the other side of the hill – the decline of proprietary trading, bank deleveraging, internalisation, disclosed liquidity platforms and the shift from an interbank to a bank-to-buyside world in FICC.

Back to the future

But what about the investment bank graduate class of 2023 that I mentioned earlier – what does this mean for them? Artificial intelligence is all the rage and this is definitely the coming wave. But old-fashioned invention, sales, marketing, and risk management will never go away in investment banking and are transferable to the land of private capital and hedge funds. And being able to adapt and pivot when market structure changes is crucial.

So too is risk management. In Blackstone CEO Stephen Schwarzman’s autobiography “What It Takes – Lessons in the Pursuit of Excellence” he describes how at the height of the financial crisis, JP Morgan pulled half of Blackstone’s credit lines, but Citigroup didn’t pull any. One of those banks was a big winner in the crisis. The other wasn’t. There’s a lesson there.

Rupak Ghose is a former financial research analyst.

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