Awards for Excellence 2014: Best global flow house

Best global flow house:

Citi

The flow business – for so long the biggest driver of investment bank earnings – faces some of the toughest challenges, whichever asset class you look at.

Foreign exchange has its investigation into potential collaboration and price fixing, with FX dealers complaining that the information flow that has traditionally driven a lot of business is drying up, and volumes with it. That’s not to mention the likelihood that the biggest FX houses might face some very big fines.

Credit markets, which have always struggled to provide liquidity, are hamstrung more than ever by the inability of traditional bank dealers to carry the same levels of inventory as they used to.

In commodities, many banks have decided to retreat from the business because of the twin challenges of a changing regulatory environment and the increasing power of specialist commodity traders.

Equity markets have been on a good run, but the battleground is crowded. It’s a business that is relatively capital light and provides a good return on assets, but that means it is the one product line that no big bank has decided to pull back from.

Perhaps the most challenged asset class of all is rates. Low interest rates, low volumes and low volatility, combined with new rules on capital and especially on leverage, have created a perfect pinch that is causing many firms to reassess their rates offerings.

And across all asset classes, central clearing and electronic trading are bringing transparency and consolidation to markets, driving down spreads and further concentrating volumes in the hands of a smaller number of players.

We are truly a single business today. We are organised as if we are in one place, even though we do business in more than 80 countries around the world Paco Ybarra

Savvy and experienced operators such as Paco Ybarra, Citi’s global head of markets, know flow remains at heart a cyclical business that will return to prominence, albeit with a changed landscape in how banks do business, and which banks are big players in which business lines.

Flow is very much at the heart of Citi’s global offering. That wasn’t always the case. Ybarra says: “Our goal is to provide liquidity in complicated markets, and create liquidity where it is hard to find. And that is how your use of capital gets rewarded.”

As little as five years ago, Citi’s output in foreign exchange was held back by regional boundaries. It was not a global business. Those silos were broken down by the management team, and a leading electronic trading platform, Velocity, was placed at the heart of the foreign exchange offering to clients. Over the past five years, Citi has risen steadily up Euromoney’s FX rankings, and this year recovered the top spot for the first time since 2002, displacing long-time leader Deutsche Bank.

But at least the building blocks in FX had been in place. In rates, that was not the case. Before the financial crisis, Citi was not even a top-10 player in rates. Since 2009, it has steadily built market share and is now a clear top-four house, competing head-on with the traditional flow monsters of Deutsche Bank, Barclays and JPMorgan. According to data from Greenwich Associates, last year Citi increased its market share in rates by more than any other top-10 firm.

In credit, as elsewhere, Citi is applying its strength in electronic trading to good effect. Throughout 2013 it ranked second for euro-denominated trading on Bloomberg. In the first quarter of 2014, it ranked first in electronic trading of European CDS indices, with a market share of 14%. Just a year earlier, it had been 7%.

In commodities, Citi has remained committed to the trading and risk-management of commodity-based financial products, leaving it well positioned for the new regulatory regime of Volcker, Dodd-Frank and EMIR. While Citi’s commodities revenues rose 230% in 2013, the revenues from the industry declined by 24%, according to data from Coalition.

Unique franchise

Citi has also reinvented its business in equities, creating a more trading-centric culture that caters to hedge funds and other sophisticated clients. This was a core challenge for the bank. Before the crisis, senior management had sent down an edict that Citi was not going to compete for hedge fund business. The bank had completely missed the boat on the rapid growth of the most important driver of client-based volumes. Over the past five years, Citi has steadily built an offering in equities for hedge funds alongside its traditional long-only client base, notably in equity derivatives – which in 2013 increased its revenues by 13% while the overall market contracted by 3%, according to Coalition.

None of this mentions Citi’s unique franchise in emerging markets, where it has more trading rooms than any other global bank, and continues to benefit from increasing flows both within emerging markets and to and from developed markets.

But perhaps the most important achievement has been to take the disparate businesses and make them one. As Ybarra says: “We are truly a single business today. We are organised as if we are in one place, even though we do business in more than 80 countries around the world.”