By John McCrank and Olivia Oran
NEW YORK (Reuters) - Citigroup plans to rebuild its long-neglected equities franchise seeking to capitalize on a retrenchment by rivals in the face of new rules designed to make the financial system less risky, according to people familiar with the bank's plans.
A lack of investment in equities and a traditional focus on bond trading kept the No. 3 U.S. bank by assets in the lower echelons of equities league tables, which measure how much revenue Wall Street banks earn from their equity trading units.
It will be tough to dislodge leaders such as Goldman Sachs Group, Morgan Stanley, and JPMorgan Chase & Co, that have long dominated the business.
But having shored up its business and capital ratios since the financial crisis, largely by spinning off non-core assets, Citi now aims to profit from a retreat of rivals that were slow in adapting to new rules that force banks to keep more capital, two people with direct knowledge of Citi's plans told Reuters.
Deutsche Bank, Credit Suisse Barclays and others are re-aligning their investment banking businesses. Prime brokerage units, which provide loans and other services to hedge funds, are being pared back in favor of less capital-intensive businesses such as wealth management.
Citi, meanwhile, plans to court hedge funds more actively as part of a four-point plan to boost its equities market share, the sources said.
The strategy includes an overhaul of Citi's trading technology, hiring key executives, expanding research and boosting the unit's financing.
The bank recently appointed former Chi-X Global chief John Lowrey to head its electronic execution unit, and ex-UBS executive Adam Herrmann to run prime brokerage.
Citi has also hired 11 analysts so far this year to support its investment advisory business, and is increasing financing of the unit in general, said the sources, who did not have permission to be quoted in the media.
COURTING HEDGE FUNDS
Citi has catered to traditional asset managers, but is now shifting its attention to hedge funds, which tend to trade more actively and can bring higher returns through fees. Mid-sized firms are especially attractive, because they lack the resources of their bigger rivals and Citi can offer them services such as risk systems, credit monitoring, and trading algorithms, which have all been part of Citi's technology revamp.
Building up its prime brokerage and bespoke equity derivatives, key to winning over hedge funds, will be difficult though, because they are capital intensive businesses, said Guy Moszkowski, an analyst at Autonomous Research LLP.
"It will be a tough slog for them," he said.
But after years of under investment and cuts in the equities franchise the bank is ready to strategically invest in the unit and will do so at a measured pace, the sources said.
Another way they said Citi is putting its capital to work is by expanding its institutional market making business, where it buys and sells large blocks of stocks or derivatives from clients.
As part of its technological push, Citi has rolled out a product in the United States, with plans to launch in Europe, called "Optimus" that helps clients select trading algorithms. "Optimus" looks at different aspects of the clients' orders, such as size, speed, and market momentum, and then picks the appropriate algorithms to scan the market for other orders that have those same qualities.
Citi's efforts to boost its equities revenues follow a concerted push to get its house in order after the 2008-2099 financial crisis, when soaring losses from bad mortgage debt forced it to take a $45 billion government bailout.
The revamp included the sale of its retail brokerage arm Smith Barney and other assets that left the bank demonstrably lighter on equities.
"It's a recurring theme where they under invested and now they have to reinvest," said Brian Kleinhanzl, an analyst with KBW.
Citi's last big bet on equities was in 2007, when it paid $680 million for retail equities market maker Automated Trading Desk (ATD). Fierce competition and years of anemic trading volumes following the financial crisis have hurt ATD business.
Citi still sees the retail order flow ATD as valuable, especially for institutional clients to trade with, said one of the sources. Still, the bank is always looking at "strategic alternatives" for the unit, said the other.
(This story has been refiled to add dropped word "to" in first paragraph)
(Reporting by John McCrank and Olivia Oran; Editing by Carmel Crimmins and Tomasz Janowski)