Hudson River & Jane Street's success bodes badly for trading jobs, particularly at European banks

If you work in a sales and trading role at an investment bank and have been paying attention, recent weeks have brought a slew of bad news. Your lunch is being eaten. The people eating it are small in number. 

In recent days, both Hudson River Trading and Jane Street have reported enormous first quarter revenues despite employing a fraction of the people who in sales and trading at investment banks.

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Hudson River Trading (HRT) reportedly generated $6.4bn of revenues in the first quarter with only around 1,000 people. Jane Street reportedly generated $16.1bn with only around 3,500 people. HRT's revenues were up 135% year-on-year; Jane Street's were up 100%. If all remains equal in the coming quarters, HRT will generate revenues per head of $18.4m this year and HRT will generate revenues per head of $25.6m.

By comparison, market research firm Tricumen thinks revenues per head in banks' sales and trading businesses are more likely to be around $6m this year when extrapolated from Q1. And this is only for the front office. Jane Street and HRT's revenue per head figures are for the whole business. 

It is a reminder that electronic trading firms are incredibly productive. 

They know it. Speaking last month, Citadel Securities' president Jim Esposito said Citadel Securities is "delighting" clients and that the firm can undertake "the same activity as a traditional player and get a much higher return." - "We only have 1,900 professionals. You are competing against banks for those same activities that might have 15,000, 25,000 employees. By definition we’re almost always going to have the best price,” Esposito expounded. 

This ability to 'almost always have the best price,' means Citadel Securities accounts for around for 25% of US equities trading volume. HRT accounts for another 20%. Jane Street accounts for another 10%. In cash equities, banks are left fighting for the scraps. 

This is partly why, at last week's Citi investor day, head of markets Andy Morton said the banks' equities sales and trading has become a fixed cost volume business. If you invest heavily in the technology, you can grow revenues without increasing costs, said Morton. The operating leverage can be high.

Morton's dynamic was illustrated most clearly at HRT in the first quarter. As we noted in Morning Coffee today, HRT's trading revenues were up 135% year-on-year in Q1; HRT's profits in the period were up 175%. 

By comparison, revenues in Citi's markets business were up by a (still impressive) 19% in the first quarter while profits there were up 40%. That's very good, but not compared to growth at the nimble electronic rivals. And many banks performed far worse. At Deutsche Bank and SocGen, fixed income sales and trading revenues fell in Q1. French banks' equities trading revenues were up less than 6%. 

There is an alternative. Citadel Securities is offering a white label trading service for banks that want to throw in the towel and use its platform instead. Deutsche Bank already pulled out of equities trading in 2019; HSBC is not what it was. 

Electronic firms are not stopping at equities. Esposito says Citadel Securities is going after any market where clients don't have access to liquidity or the best technology. This includes rates trading. Flow credit is succumbing: Rupak Ghose noted that slide seven of Morton's presentation last week showed credit intermediation revenues at Citi halving between 2021 and 2025. This was partly because Citi pulled out of munis and distressed debt trading. It was also because credit trading is becoming more electronic. Spreads are narrowing. Human traders are vanishing. 

It's a bad time to work in a bank on the margins.

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