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November 29, 2005

Deutsche Aims Higher: Deutsche Expects to Prosper as Street Revenues Decline

By Peter Chapman

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The recent agreement between Fidelity Investment Management and Lehman Brothers to devote commission payments strictly to executions (and to pay for research separately) was greeted with cheers in the trading department of Deutsche Bank Securities. If more firms on the buyside and the sellside adopt the Fidelity/Lehman unbundling plan, executives at Deutsche and elsewhere believe, the resultant decline in the Street's revenues will force a shakeout that will leave standing only the biggest and strongest sellside trading houses.

Deutsche Bank intends to be one of those. "This could be a significant catalyst for some sort of shakeout in the industry," says Rob Karofsky, Deutsche Bank's co-head of cash equities and global head of program trading and direct market access. "We view that as positive."

Karofsky's employer is investing heavily in talent and technology in the U.S. cash equities space in order to catch such bulge-bracket rivals as Goldman Sachs and Morgan Stanley. Despite a dominant position in cash equities and program trading in Europe and program trading in the U.S., Deutsche is considered a Tier-II player in single-stock trades in the U.S.

It ranks about 15th in surveys of market share, including Thomson's AutEx BlockData share volume survey. That puts it in the same league as Banc of America Securities and CIBC World Markets.

Largest Trading House

For one of the largest banks in the world and a leading equities house overseas, Number 15 is not good enough. "We are determined to make Deutsche Bank a leading player in the U.S. equities markets," said Tom Gahan, chief executive of Deutsche Bank Securities. "It will not happen overnight, but we are confident it is a very achievable goal."

Deutsche Bank is actually the largest trading house in the world when both fixed income and equities securities are taken into account. It took in EURO5.4 billion in the first half of 2005 from global sales and trading, just beating out Goldman Sachs with EURO5.1 billion. That's according to data compiled by Citigroup Smith Barney.

Exactly EURO4 billion of those revenues came from the sales and trading of fixed income securities, though. The bank is the largest player in debt trading; Even bigger than Citigroup.

Equities is a different story. Deutsche took in EURO1.4 billion from its worldwide equities businesses, placing it fifth behind UBS, Goldman, Morgan Stanley and Merrill Lynch. It is estimated that half of that is generated in Europe.

Deutsche Bank's latest drive to the top started late last year with a wholesale restructuring of its investment banking business. In sales and trading, equities was merged with fixed income and brought under the leadership of Anshu Jain. The Indian-born whiz had guided Deutsche's fixed-income group into the upper brackets of bond trading in the past few years.

Gahan, formerly head of corporate finance in the Americas, was put in charge of the entire U.S. investment bank. Kevin Parker, who was head of equities, was moved over to Deutsche's asset management arm. Ralph Reynolds, formerly global head of equity trading, expanded his role to global head of cash equities.