Prime Brokers Overview

   Goldman tops Morgan Stanley in three scoring categories — securities lending, trade execution and trading technology, and algorithmic trading. Goldman owes much of its success in trading to the firm’s 2000 acquisition of broker Spear, Leeds & Kellogg and its Rediplus electronic trading system, which is used by many of the firm’s prime brokerage clients. “We have a very strong platform, with a very strong regional presence in Asia, Europe and the U.S.,” says Lieberman. “We are totally integrated.”

   Total integration — that is, the ability to trade seamlessly in all markets all the time — is important both for clients and for their prime brokers. It helps firms like Goldman capture the business of multistrategy hedge funds, which tend to trade more actively and generate more revenue than traditional long-short funds.

   Technology is one area in which the up-and-coming prime brokers say they have an edge over their more established rivals — and few speak with more conviction than Banc of America. In January, BofA launched its new liquid-products prime brokerage platform, which handles interest rate derivatives, Treasury products and futures. Christopher Pesce, who joined BofA from Goldman in 2002 to expand its prime brokerage operations beyond equities, says the bank was able to get its new platform up quickly because it didn’t have to design around an existing technology.

   “We aren’t saddled with legacy systems, so we were able to recruit people from other firms, avoid problems and grow our platform with new technology that is now available in the marketplace,” says Pesce, the New York–based global head of prime brokerage. The firms that pioneered prime brokerage operations 20 years ago — Goldman, Morgan Stanley and Bear, Stearns & Co. — have to build around existing, more antiquated systems, he adds.

   BofA’s rapid growth in prime brokerage — the firm had 190 people in prime brokerage when Pesce joined; today it has 450 — is reflected in this year’s results. The bank jumps two places to No. 3 overall and ranks first among clients in both operations and reporting and reporting technology.

   Pesce reckons BofA can do even better. Unlike his former employer Goldman, which makes much of its money from proprietary trading, BofA bases its business largely on financing and lending. “The balance sheet and capital that the bank has are second to none,” Pesce says of BofA’s lending capabilities. “Now we have a full product suite, we expect to continue gaining market share.”

   To do that, BofA will need to expand its international footprint, as more hedge funds are looking to trade globally. Prime brokers that cannot provide access to non-U.S. markets are at a disadvantage, says Ron Suber, president of Chicago-based Spectrum Global Fund Administration. “Brazil, Russia, India, China, Asia and Europe — you’ve got to be there because that is where the hedge funds are going to go for alpha and opportunity,” explains Suber, who was head of Bear Stearns’ prime brokerage sales before joining Spectrum in the spring. Clients say one of the reasons Suber’s old firm falls in the Alpha Awards this year is that the New York–based investment bank is not sufficiently global to keep up with hedge funds’ demands.

   UBS, Credit Suisse and Deutsche Bank finish in a tight pack. The three big European banks have been making a push to gain market share. At UBS, global head of prime services Alex Ehrlich has been busy adding people and services since he left Goldman to join the Swiss bank in New York three-plus years ago. “It became clear that the effort to create one of the world’s leading prime brokerage businesses was going to cost hundreds of millions of dollars, require hundreds of people and take years,” says Ehrlich, whose firm is starting to see the fruits of his labor. UBS moves up one place, to No. 4.