HSBC weighs out some transaction actions to increase profits

(Bloomberg) – HSBC Holdings PLC is considering outsourcing a portion of its massive trading business as executives work to justify the investment in technology needed to align with larger competitors.

Europe’s largest lender has conducted preliminary discussions on directing its fixed income trading order flow to external market makers, according to people familiar with the matter. The moves would save HSBC millions of dollars in IT costs associated with operating tables around the world, the two said.

People said HSBC is open to companies including Citadel Securities and Jane Street Group, asking not to identify private information. People say that internal deliberations within the company are in an early stage and that no certainty will lead to transactions.

A spokesperson for HSBC, Castle Securities and Jane Street declined to comment.

HSBC’s willingness to consider such a deal shows that even banks with a systemic importance that operates by a vast Wall Street (lenders that operate one of the world’s largest debt capital market teams) are working to make the necessary technology investments to properly compete for transactions.

First reported in July that Citadel Securities, a marketing merchandise founded by billionaire Ken Griffin, has been developing the idea of ​​such a trading service. Under these freshman plans, market makers will manage the courage of the trading desk (including technology, analysis and order execution), while banks will continue to deal with customers.

According to people familiar with the matter, Jane Street also discussed services that offer similar services to some banks. Its interest in providing such an arrangement has not been reported before.

Such a partnership will be the latest sign that even the world’s largest banks lack the scale needed to compete with Citadel Securities and Jane Street, not to mention traditional competitors such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley.

These days, both market makers are capturing bigger deals. Citadel Securities, for example, now handles more than one-third of all listed stock transactions in the United States. According to the filing, Jane Street accounted for 10.4% of North American stock market activity in 2023, up from 7.7% of the previous year.

According to a report by the Boston Consulting Group, the so-called non-bank liquidity provider has more than doubled its share of global market revenue bins in just six years.

Meanwhile, traditional lenders’ share in the overall transaction flow has been declining.

European banks’ share of global transaction revenues fell 10 percentage points to 29% in the past eight years, according to Bloomberg Intelligence dataset. Analysts found that HSBC was one of the worst performers at the time.

“European investment banks, especially General Social and HSBC, need to cut costs to protect profits because they have the potential to cut $167 billion in transaction market share to U.S. competitors,” Bloomberg Intelligence Analysts Philip Richards and Uzair Kundi said in a note to clients.

Within HSBC, executives like Citadel Securities or Jane Street can provide customers with better transaction prices in addition to helping them cut costs, which is a key purpose for new CEO Georges Elhedery to transform the bank.

People say they are still worried that this could undermine their ability to compete correctly in certain areas, such as major brokerage firms, which Elehedery has designated as a focus of growth.

In many banks, these financing operations have been helping to increase revenue in recent years. For example, at Goldman Sachs, between 2020 and 2024, almost all revenue growth in the company’s marketing division came from the company’s financing operations.

For market makers, reaching an agreement with HSBC would be a huge coup. At Citadel Securities, executives initially envision such a product that might primarily attract medium-sized banks, which simply lack any size to compete for business.

Since taking the top position in September, Elhedery has not been afraid to bring the axe to many of the large businesses in the HSBC franchise without the proper size to compete or generate enough returns. For example, the company recently announced it would close all its mergers and acquisitions and stock underwriting operations in the United States, the United Kingdom and the continent.

“We are redistribution of costs, especially from two areas that are subscaled and therefore don’t really have a real impact,” Chief Financial Officer Pam Kaur said in a conference call with analysts last month. “There are other things that aren’t substantial profitable, as we say at investment banks.”

Investors have so far rewarded Elhedery for restraint: London-based lenders’ shares have risen by more than 30% since he took over. This month, their deals far exceeded the January 2001 record.

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