Morning Coffee: Frightening words from Sergio Ermotti. JP Morgan turns coders into traders

It sounds from his latest interview as if UBS CEO Sergio Ermotti has been hitting the gym. He’s “pushing the bar to the next level”, and “putting the bar higher”. But while the literal weights he’s lifting are as yet unknown, the metaphorical weights hanging from this bar are the weight of excess costs, particularly at the investment bank. “Changing how we do investment banking” is the new idea, and like “evolving our business model” from the results conference call last week, it sounds like it means job cuts.

To a certain extent, although a CEO with costs on the brain is always bad news, it might not be new bad news. The Karofsky/Novelli “merger without a merger” plan has been widely trailed, and although the detail hasn’t been announced, there have been enough hints about what sort of things are planned at UBS. Further streamlining of the trading businesses to put equities, credit and rates into a single business unit, global reporting lines with fewer co-heads and geographical empires, that sort of thing. But looking at the numbers, it’s hard to escape the sense that there might be more to come.

“People familiar with the situation” quoted by Bloomberg are talking about “hundreds” of job cuts. But according to the results call, the cost savings anticipated from the investment bank reshuffle are only $90m, of which $81m is to come from personnel costs. And that’s … not much? It’s equal to 3% of the 2018 personnel costs of the Investment Banking division. And, given that the fully-loaded average cost of a UBS employee is a bit more than $500,000 per head, the savings anticipated would correspond to only about 160 people, fewer if the program is, as rumoured, targeted toward the upper levels of middle management. The remaining $9m is almost exactly the cost of one Bloomberg subscription per person fired.

All of which suggests that if it’s true that Ermotti is “obsessed with costs”, and wants UBS to be “in the forefront” when it comes to “putting the bar higher in changing how we do investment banking”, then this might not be it; rather than being the main event, the Karofsky/Novelli plan could be a preparatory move getting ready for something substantially more radical. Potentially something that would justify the rumours of “hundreds” of job losses. And if the current plan represents the limits of what can be achieved by sweating the cost base of the existing operations, then the more radical version might have to involve actually shutting down either activities or geographies.

So far, UBS hasn’t said anything about further cost-cutting plans, but it would be natural not to do anything to frighten the employees before any definitive decision has been taken. So it looks like it would be a very good time for any UBS investment banking divisions to pull out any great Q4 money making ideas they had been saving up. And that doesn’t just go for the revenue lines that had a tough Q3. The very most frightening phrase in the whole of this interview is the assertion that “Nothing is really untouchable”.

Elsewhere, JP Morgan has gained regulatory approval for two of its coders to trade equities, one in New York and one in London. It’s not one hundred per cent clear what this means – it’s certainly not the first algorithmic trading desk JPM has ever had, for example, and it also seems unlikely that there’s never before been any quant at JP Morgan who was certified as a material risk taker. But JPM’s head of global equities, Jason Sippel, certainly thinks it’s a big deal – he says: “it’s moving at warp speed and re-inventing what the trading floor looks like”.

What might be going on is that this isn’t about “license to trade equities”, which isn’t really how the system works these days. It may be that these two people (and another eight to come before the end of this year) are the first to be given full responsibility and regulatory accountability over a trading book, who were hired as programmers for the algorithmic system. In other words, the quants are no longer a service provider to the trading desk; they are the trading desk.

Meanwhile

It’s LME Week in London, and the riot act is being read … the Exchange has been handing out copies of its code of conduct to its attendees, reminding them to, if at all possible, not hold any evening receptions in the Playboy Club this year. (Financial News)

Nothing says “cost cutting programme” like “we are reviewing whether or not to close the exclusive private members’ club that we bought for our executives where they have free membership and subsidised food and drink”. In this case, it’s KPMG, going very much against the accountancy stereotype, with their “Number Twenty” London townhouse likely to be shut or sold. (FT)

JP Morgan, on the other hand, is considering selling its investment banking headquarters building and rationalising its New York property portfolio. As well as back office functions, some “junior investment bankers” might be moved to Columbus, Ohio or even Plano, Texas. (Bloomberg)

A profile of Andrew Bailey, front runner candidate to be the next Governor of the Bank of England. It’s never clear whether appearing in the press and very publicly wanting one of these jobs is a net positive or negative in the hiring process. (The Times)

David Tyoember, who stood outside Underground stations with a sign proclaiming his desire for an asset management job, has landed a role at Amundi. (Financial News)

Steve Eisman (of ‘Big Short’ fame) reckons that every sector “its own, for lack of a better term, mafia” that sets the conventional valuation measures to decide whether a stock is cheap or expensive. (Investment Week)

And the big insider-dealing ring trial risks turning into a fiasco, as the US prosecutors have managed to lose track of suspect Benjamin Taylor, because they submitted an extradition request to Monaco in English rather than French, and . Taylor skipped town before the mistake could be corrected. (Bloomberg)

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