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August 1, 2010

Broker Focus: Bigger is Better for Citi

By Peter Chapman

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"We think it is important that a corporate customer understands you are not only there to help them stabilize the stock on day one," Keegan said, "but that you are an active market maker on their behalf for the next six months. Oftentimes, capital dries up after the deal heat is gone and only resurfaces as you get closer to a secondary."

Shane Swanson, Lava/Citi

Keegan predicts that five firms will control 80 percent of the volume of the U.S. market in the next three years. The exec wants Citi to be one of them, noting that it is already one of the five biggest providers with its top 200 accounts.

Citi has about a 13 percent market share. That number has not changed substantially in two years. Keegan noted that its market share was on the rise until the firm ran into "Citi-specific problems" related to the 2008 financial crisis.

A good chunk of Citi's inflow comes from its stake in retail giant Morgan Stanley Smith Barney. Citi has a 49 percent stake in that venture, created after the bank sold its Smith Barney unit to Morgan Stanley. But Citi head Vikram Pandit has indicated he will eventually sell it all to Morgan Stanley. All flow would likely head to Morgan Stanley when that occurs.

Achieving critical mass is not easy, sources say, whether the aggregator is a broker or an exchange. Bill Harts, an operating partner with Bessemer Venture Partners and former head of strategy for Bank of America Securities' equity trading group, notes that size is indeed helpful when it comes to servicing clients, but difficult to attain. Harts is also skeptical of a growth strategy that relies on the matching of institutional orders with retail flow. "Unless they are benchmarked against a passive metric like VWAP, institutional clients typically don't have the patience to wait in a dark pool for the right retail order to come along," Harts said. "They want to get their trades done quickly. This accounts for the popularity of so-called "arrival price" algos."

While Citi is not alone among big brokers targeting market share and viewing themselves as liquidity aggregators, its philosophy is not universally shared among the bulge bracket. Morgan Stanley, for one, has a different idea of its place in the market. "The role of the exchange and the role of the broker have become blurred over time," Andy Silverman, Morgan Stanley's global co-head of electronic trading, said. "We are not here to compete with the exchanges. We are here to service our clients."

At Citi, the electronic trading group handles upward of 70 percent of Citi's total U.S. equities inflow. It counts as customers traders both inside and outside the firm.